12 Reasons Why Ritholtz and Many Experts Are Mistaken On Gold
by Mark O’Byrne, GoldCore Being involved in the fairly niche business of an international gold brokerage for nearly 12 years now, we find ourselves continuously engaged in conversation with people who demonstrate an incredible lack of understanding of the function of gold and the importance of gold as a DIVERSIFICATION and as a SAFE HAVEN asset. This lack of understanding is not confined to the public but also prevalent with some financial experts. One example of this is one of the more vocal anti gold experts in recent months – leading Bloomberg columnist Barry Ritholtz. This lack of understanding results in many investors being very exposed and at risk of financial losses due to their significant over exposure to paper assets and fiat digital currencies and complete lack of any allocation to gold whatsoever. These experts are highly intelligent people. As are many in the public and yet the concept of diversifying and having an allocation to gold is utterly foreign to them. The public have little terms of reference except for movies such as Goldfinger and fairytales about Leprechauns and crocks of gold. Indeed, their primary reference point is often jewellery, wedding rings and of course the recent ‘cash for gold’ phenomenon. They have no understanding of the central role gold plays in macro-economics, geopolitics and of course monetarily. They have no knowledge of the fact that gold has protected people throughout history from financial and economic crashes and from currency devaluations. The significant body of academic research on gold showing it to be a hedging instrument and a safe haven asset is ignored and unknown. We find ourselves constantly confronted by the same set of ill-informed opinions on gold. Many of these misconceptions were encapsulated in a 2013 article by Barry Ritholtz, with the peculiar title “12 Rules of Goldbuggery”. Oddly, we happen to agree with a lot of what Ritholtz has to say. There are some – among the diverse range of people online who promote ownership of physical bullion coins and bars – whose enthusiasm for the metal can border on religious zeal. They are a minority. At the same time we feel that Ritholtz’s article was somewhat disingenuous. It was unbalanced and simplistically denigrates gold ownership – ignoring academic research and indeed history and the experience of recent years – the U.S. and Euro zone debt crisis, Lehman Brothers etc. The article was very widely disseminated and will have discouraged many investors from allocating to gold in a properly balanced portfolio. The immediate problem with critiquing the disparaging remarks in “Goldbuggery” is that Ritholtz doesn’t approach his distaste for gold head-on. Instead he puts words in the mouth of apparent “gold bugs”. He therefore avoids making statements he may later regret. Certainly, some of these views are held by some gold buyers but, in our experience with our clients, they are by no means the mainstream view in the gold community. It is worth noting that there is no asset-class other than gold where its proponents have their own derogatory classification. We are labelled “gold bugs”, but there are no “stock-roaches” or “preying-bankers.” Let alone “paper bugs”, “dollar bugs,” “euro bugs” or heaven forfend “banker bugs.” One has to ask – why the silly name calling regarding gold. Why use a pejorative and derogatory term for those who own physical gold to protect themselves from market turmoil and currency devaluations? It suggests an anti gold agenda or at least anti gold beliefs. Let us now look at Ritholtz’s Twelve Rules of Goldbuggery. We will look at each of these contentions and deconstruct them one by one. 1.Gold is Currency That gold is a form of currency and money is self evident. If it were not, central banks, particularly in Asia, would not be buying vast amounts of it and Western central banks would not continue to be holding vast amounts of gold reserves. When the U.S. shut Iran out of the SWIFT system Iran began successfully trading oil for gold. In extremis, at this time and place in history, gold is the ultimate form of payment as Alan Greenspan recently pointed out. Ritholtz suggests that proponents of gold ownership view it, irrationally, as a permanent store of value because it was declared so in Greece 2700 years ago and “it shall ever be thus.” Placing monetary value in a piece of metal is an abstraction, we agree. However, in practical terms there is no company, currency or empire that has outlived the value that man has placed on gold. Maybe the time will come when humankind devise a more sophisticated means of exchange but in the here and now gold is money. In the not unlikely event of a monetary crisis, with currencies based on confidence alone today, gold – which has industrial applications and psychological appeal – will again retain value and outperform. The ECB’s Mario Draghi said gold is a monetary “reserve of safety”.