Whatever happened to ‘Buy gold’?

By Forex Zone
November 23, 2016

Throughout much of history, gold has been a place of refuge from financial uncertainty. Many Germans treasured gold during the hyperinflation of the 1920s. During World War II, people fleeing the Nazis used gold coins to pay for help in their escapes. When inflation took off in the late 1970s in the United States, people rushed to buy gold, which soared to more than $850 an ounce in 1980. For many people, gold is portable, virtually indestructible and universal as a store of wealth.

The obvious answer: Unlike the 1970s, when inflation hit nearly 13%, the dollar remains the world’s strongest and most sought-after currency in spite of economic slowdown, lower interest rates and even terrorist attacks.

Even though the Federal Reserve has pumped billions of dollars in liquidity into the economy, starting last January, we haven’t seen a whiff of inflation. One reason we haven’t seen inflation this year is that much of that newly created money merely offset the trillions of dollars that melted away in the stock market decline of the past 18 months.

If you define inflation as a phenomenon of “too much money creation” or “too much money chasing too few goods,” you’re faced with this reality. The world is more awash in goods than in dollars and consumers who are badly shaken by terrorist attacks and anthrax scares. With little fear that the dollar may tumble badly, there’s no reason to turn to gold as a safe haven.

Some 30 years ago, when inflation was high, gold’s enthusiasts could generate plenty of excitement. And two of the most prominent “gold bugs” of the time, while not roaringly bullish today, still advise keeping a small position in gold stocks. James Dines and Howard Ruff are two legendary names in the world of gold investing. Each made a fortune for himself and his subscribers in the 1970s by predicting soaring gold prices. But when the bull market in stocks erupted in the 1980s, gold was crushed. Each says he led his followers out of the gold market in time to preserve those gains, though some challenge that assertion.

How do they view today’s situation?

Dines: Take advantage of the uptrend
James Dines has been editor and publisher of The Dines Letter since 1960, one of the longest-lived advisory services around. Dines, who proclaimed himself “The Original Gold Bug” back in the 1960s, made his reputation as among the first to predict that gold would be freed its then government-fixed price of $35 an ounce and move substantially higher. Then, he predicted the price of gold and the Dow Jones Industrial Average would cross. They did. Gold soared to $850 in early 1980 as the Dow was tumbling down to nearly 750.

Dines got off the gold bandwagon and bet on stocks in the ‘80s and became a big Internet proponent in the mid-1990s. But he guided subscribers out of most Internet stocks in 2000.

In the meantime, he’s had longstanding “buy” recommendations for gold stocks, including Agnico-Eagle Mines, Franco-Nevada, ASA and Barrick Gold, as well as Battle Mountain convertible bonds. Today Dines says: “Gold mining shares have remained in surprisingly determined and unnoticed uptrends for the last year, just as the tech sector has been crashing. But few people have noticed gold.”

Indeed, even if bullion prices haven’t gone anywhere, the stocks and stock funds have. Precious metals funds have been among the top performers in 2001 — a year where investing in stocks generally has been awful.

Dines sees a major recovery in gold prices during the next big currency crisis. He see it erupting first in Argentina or Brazil some time next year and affecting all of Latin America, including Mexico. He expects that the response to a currency problem will be similar to the 1997 flight to gold when Asian investors turned to the precious metal as their economies and markets collapsed around them. But Dines strongly favors gold shares instead of bullion, because gold shares pay dividends and tend to move ahead of the price of the metal itself.

What’s holding the price of gold flat is the relative strength of the dollar itself, Dines says, and that precludes a major rise in gold in this country. But his newsletter shows charts of gold prices denominated in Canadian dollars, Australian dollars, South African Rands and Indian rupees. In all of those those currencies, gold clearly has been rising — but so has the U.S. dollar. And you can earn interest, albeit low, on dollar deposits.

Ruff: Prepare for the worst
Howard Ruff became a regular on talk shows and in newspapers thanks to his 1977 best seller, “How to Prosper During the Coming Bad Years,” which sold more than 3 million copies. Ruff’s centerpiece advice was to buy gold at $125 an ounce, which was great advice because gold was about to take off.

Ruff continues to have a following for his newsletter, Ruff Times, which appeals, he says, to “salt-of-the-earth, God-loving and God-fearing people who love their country, but fear and distrust their government.”

But he says the markets have humbled him. After gold peaked at $850 an ounce, it has trended downward — with the occasional uptick — ever since.

Nonetheless, he’s willing to predict that “in the long run, gold bought at today’s prices is going to be worth a lot of money at some time in the future.” When pressed about how far away that future might be, he said, “Not tomorrow, or next week, but perhaps one, two or three years from now, it has the potential to be worth $2,000 an ounce.”

In the meantime, Ruff has been telling subscribers to buy Treasurys, even at today’s low yields, because he expects rates will fall further. And he still advises his followers to store non-perishable food supplies “as a precaution against a worst case.”

Other alternatives
Gold is not the only alternative if you’re worried about the value of the dollar, of course. The euro will become the only currency of Western Europe in two months. Gone will be the opportunity to speculate in French francs, German marks or Italian lira. Close cooperation between European nations will be required, a process that has already started. But do you want to bet your life savings on the euro?

Asian and Latin American currencies have their own well-advertised problems. In fact, many of those countries see pegging their currencies to the dollar as the ultimate solution to their economic woes.

Still, there could be alternatives other than gold or foreign currencies, if speculators turn bearish on the dollar: soybeans, possibly, real estate or crude oil again.

Gold’s glory gone?
It could well be that the world that sought refuge in gold no longer exists. Today’s global speculators can move hundreds of millions of dollars with the click of a computer mouse. Since gold has to be stored and insured and guarded, it is costly to own, making its portability less of an allure. The tons of gold reputed to be stored in Comex vaults in the lower levels of the World Trade Center are, for now, inaccessible. At the same time, the financial markets were up and running in a week.

So what role, if any, should gold play in your investment portfolio? Gold bullion doesn’t have much of a place, in my opinion, though I am partial to gold jewelry. But dividend-paying gold stocks or precious metals might be worth another small look in a diversified stock portfolio. They certainly provide a hedge against other positions. And most have been moving up. You can purchase shares of individual gold mining companies, or there are many mutual funds that specialize in gold shares.

But the best reason for owning at least some gold stocks is the fact that you’re laughing at the very idea. My editor did, too. Nobody’s out there writing about gold stocks, or publicly recommending them. Just as nobody wanted to be laughed at for recommending the sale of dot-com and technology stocks two years ago. Experience has taught me that just when “everyone” thinks an investment idea is absolutely ridiculous, it’s time to take that idea seriously. The only problem is, you’ll never know how much time it will take before people catch on.

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