All That Glitters….Why Gold is not the (only) Answer

By Kevin Freeman
July 01, 2011Jul 01, 2011

One of the questions that comes up most often in a discussion of Global Economic Warfare is:

            How do I protect my investments?

The answer most often provided is a "leap of faith" call to sell everything and exclusively buy GOLD. While owning gold can be good advice to a point, there are a number of important considerations before selling everything in a possible rush to what could turn out to be fool's gold.

Please understand that the purpose of this Blog is not to provide investment advice but rather to discuss the topic of economic warfare and financial terrorism. Having said that, the issue of investing does directly relate to the topic. What we are sharing is for informational purposes only. It is not intended as investment advice. Every individual situation is unique and deserves individual attention. We recommend that investors seek competent advice from a professional.

Two key considerations before plunging into GOLD:

  1. Gold has already enjoyed an amazing run. Yes, in the event of another crisis, gold could move significantly higher than even today's elevated levels. And yes, gold in inflation-adjusted terms is still below the peak of the late 1970s. But, as you can see in the chart, gold prices can be volatile. In hindsight, gold was a great opportunity around $300 an ounce less than a decade ago. Now, however, the price per ounce is more than $1,000 higher. The last time gold prices rose at this pace, the price collapsed and stayed low for two decades. Now, as they say in the business, "gold is a very crowded trade." Not an hour passes without CNBC comment on the price of gold. This is similar to how internet stocks were treated in the late 1990s. This doesn't mean that there's a bubble or it will burst. It does mean, however, that prices don't always rise.
  2. Warren Buffett's wisdom. Warren Buffett has an amazing performance track record over the years. He avoided internet stocks in the late 1990s, however, and underperformed the market for a brief period. He is skeptical toward gold as noted in the following quote:

    "Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."


  1. Gold as currency. While the world has operated on a gold-based monetary standard at various points, there are some serious practical issues. One of them is that it is believed that every ounce of gold available in the world today would fit inside about two and one-half Olympic-sized swimming pools. It would barely fill a six-story building. That's somewhere around 5 billion ounces estimated or less than $7 trillion in value based on today's price. That's a lot of money for certain but not enough for a $75 trillion global economy. It's even less than half of total U.S. Federal debt. This analysis means that gold may be impractical as a global currency. Historically, however, over the long run the price of gold does rise as the amount of currency in circulation increases.
  2. Gold can be manipulated. Another serious issue with gold is the fact that Central Banks and governments can and do artificially manipulate the price. Based on World Gold Council figures, it is estimated that Central Banks own or control nearly 17% of the total supply in the world. We say estimated because no one really knows for sure. Central Banks can buy and sell in secret. They may even sell short. With nearly 1 billion ounces under their control, they can move the price in whatever direction they would like, at least in the short term. Governments have even fixed the price to suit their needs.
  3. Gold can be confiscated. During the lifetime of many living Americans it was illegal to own gold. President Roosevelt ordered gold to be confiscated in 1933 during the midst of the Great Depression. It didn't become fully legal for Americans to own gold again until the 1970s. If done in one crisis, could it be repeated in another? Some people are selling gold coins based on the idea that certain rare coins were exempted from the confiscation. But, there's no guarantee that the same exemption would be allowed in a future crisis. The point is that governments in crisis can disrupt the best laid plans. This is one big reason that owning gold cannot be the single, one-size fits all solution for an economic crisis.
  4. Practical considerations. Gold is expensive to keep and produces no income. You have to have sufficient storage, security, and insurance. For example, how would you safely keep $5 million worth of gold at home? There also can be restrictions on resale and all sales may be reportable for tax purposes. Gold is also taxed as a collectible so it is not subject to certain capital gains tax breaks available to other investments. Finally, there is a great deal of fraud in the gold market. You have to be certain you are getting the real deal. All of these things make gold impractical as a single solution.
  5. Positive factors. Having discussed the various concerns, it is important to recognize that gold has many benefits, particularly in the event of an economic crisis. Gold could skyrocket in price if a Phase Three currency attack happens as we have been describing. Even though gold shouldn't be viewed as a single solution, it is very likely a major part of an overall solution. Massive paper money printing should benefit gold. An economic war should benefit gold. Emerging market demand should benefit gold. All of these reasons make gold attractive as a significant component of an overall investment portfolio, especially in difficult times.

So, what is THE answer? We believe that diversification is essential, including gold. It may be important to diversify holdings with a variety of inflation or crisis hedges. These could include:

  • Productive assets that have pricing power even in the event of serious inflation (including technology shares and other businesses that can prosper during inflation
  • Foreign currencies and assets priced in other currencies
  • Energy of various types (oil, coal, nuclear, natural gas, solar) in various forms (commodities, shares of producers, equipment makers, etc.)
  • Food and agriculture-related investments including farmland, farm equipment manufacturers, and fertilizers
  • Other commodities
  • Other precious metals (silver, platinum, palladium)
  • Gold in various forms (bullion, coins, ETFs, shares in miners)
  • Other commodities including copper and zinc as well as shares of materials producers

One of the primary reasons that we stress diversification has to do with human behavior and timing. At any point, any of the above-listed investments could rapidly rise or fall in bursts of greed or fear. Diversification helps to smooth the swings. Equally important to owning the right investments is avoiding the wrong ones. We may discuss investments that could suffer in a Phase Three environment in a future Blog. Again, this is not investment advice. Every investor must do his or her own homework and should evaluate options carefully with the help of a professional. But, as a general rule, we do not believe that gold is an exclusive "one size fits all" solution.

At one point or another, every investment has failed in some way. Given that, maybe the best advice of all time came from Jesus, as recorded in the Gospel of Matthew, Chapter 6, verses 19-21. His words teach us to not make our investments our treasure:

"Do not lay up for yourselves treasures on earth, where moths and rust destroy and thieves break in and steal; but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal. For where your treasure is, there will your heart be also."

All posts Copyright (c) 2011 Kevin Freeman, All Rights Reserved