Masters Series: What You Don't Know About Gold
Editor's note: Gold isn't an investment. Gold is money.
Few people – including even the world's best investors – understand this concept. But it's vital if you want to protect your wealth.
Today's Masters Series essay comes from the Stansberry Research Gold Investor's Manual. It features an interview with then-editor-in-chief Brian Hunt – who now serves as managing partner for our Legacy Research Group affiliate.
In it, you'll learn some of the biggest myths surrounding the precious metal, and why gold is a form of "insurance." It could be the one of the most important things you'll read all year...
What You Don't Know About Gold
Stansberry Research: Brian, as you recall, we probably get more questions and reader feedback on gold than on any other subject here at Stansberry Research... And we've noticed there are quite a few myths and misconceptions about gold out there. Can you go over some of the big ones for us?
Brian Hunt: Sure. Probably the biggest misconception investors have about gold is that they see it as an investment.
They'll listen to the folks on CNBC pick apart and analyze every $30 move in the metal, just as a move in crude oil or stocks or bonds would be analyzed. They'll check the price quote every day... to see how their "investment" in gold is performing.
This just isn't the way to view gold.
Gold isn't an investment. A thousand shares of health care company Johnson & Johnson is an investment. J&J pays a dividend. It's a business that's going to grow its cash flows and pay a portion of those cash flows out to its shareholders.
An income-producing rental property is an investment.
Bought at the right price, a rental property will return all of your original capital in the form of rent checks... and the rest is gravy.
Gold isn't like those two examples at all. Gold is money.
It has been used for money for thousands of years because it's easily divisible, it's easily transportable, it has intrinsic value, it's durable, and its form is consistent around the world. And as Doug Casey reminds us, it's a good form of money because governments can't print it up on a whim. You can't "Bernanke your way to wealth" with gold.
Gold doesn't pay interest or a dividend. It doesn't have profit margins. Your gold holdings amount to lumps of metal held in storage.
The sooner the investor realizes that gold is money... and not a conventional investment, the better off he'll be. It's just a timeless form of money. That's it.
Stansberry Research: People can also view it as insurance, right?
Hunt: Right. Because gold is real wealth that you can hold in your hand, it's also "crisis insurance"... or "wealth insurance." Like regular insurance, you buy gold and hope you don't have to use it.
Gold is insurance against governments doing foolish things with their finances. It's going to hold its value if governments do crazy things that lower the value of their paper money, like the United States is doing with the dollar.
A currency is sort of like the share price of a country. Over time, if a country manages its finances well... if it produces more than it consumes, saves plenty of money, and maintains a modest amount of debt, the value of its currency will rise.
If a country consumes more than it produces... if it spends lots of money, and borrows a lot in order to do all of that spending, its currency will fall in value. While currencies fluctuate for all sorts of reasons in the short term, over the long term, countries that manage their checkbooks will enjoy strong currencies. Countries that mismanage their checkbooks see their currencies plummet.
The U.S. dollar lost around 33% of its value between 2000 and 2012. This decline is because the world is waking up to the awful situation America has borrowed and spent its way into.
During the same time, gold climbed from less than $300 per ounce to more than $1,790 an ounce.
The U.S. dollar fell by that amount because our chief central banker basically told the world that he'd print lots of money in order to allow our current political regime to spend lots of money... and to bail out every American who can't balance a checkbook or show up for work.
My friend Porter Stansberry calls our current dollar situation a full-blown crisis. He's probably right.
And gold is demonstrating its value as crisis insurance.
I wish I lived in a country that produces more than it consumes... that values personal responsibility and saving money. That has a government that believes in fiscal responsibility. But I don't.
About half of this country is on the government dole in some form or another. More than 45 million people are on food stamps. People are being paid by the government not to work. The people employed by the government enjoy huge, outsized salaries for what they do.
This situation is a crisis. That's why I own gold... and recommend people keep at least 5% or 10% of their wealth in gold.
But here's where I differ from the average gold owner: I'd love to see gold fall down to $300 or $400 per ounce. I'd love it if the value of my crisis insurance would fall, rather than skyrocket... for the same reason that I don't want my family's house to burn down... or that I don't want someone to T-bone my car in an intersection.
But I look at the gang of clueless college professors, career politicians, and other types who have never held real-world jobs occupying the White House and Congress... And when I consider that half of this country is on some form of government dole, I know there is no political will to rein in spending and borrowing.
Stansberry Research: Yes... we all need insurance from that. Do you think at least large institutional investors, like mutual-fund companies, understand gold?
Hunt: Absolutely not. They are just as ignorant about gold as the average Joe on the street. They might even be worse.
From the early 1980s to 2000, nobody worried about insurance. Stocks and the economy boomed for nearly 20 years. Gold languished for a long time.
Its importance as real money – as a crisis hedge – was forgotten by most people... even by the supposedly smart folks who run big investment funds.
They learned their trade during a period of rising stock prices and falling gold prices, so they think gold is something right-wing nuts stockpile alongside canned food in a bomb shelter. It's amazing how a few decades of smooth sailing will make folks forget gold's importance as insurance against disasters.
I've heard lots of supposedly smart institutional investors pooh-pooh gold because it didn't perform well during the 1980s and 1990s. They'll post charts showing how it lagged behind stocks and real estate.
It's a silly comparison, because gold isn't an investment like stocks and real estate can be. Gold is just gold. Like I said, you own it and hope to never have to use it. You don't get it confused with a stock like Johnson & Johnson.
Stansberry Research: We think you've made your point. Any parting shots?
Hunt: Just one more. It involves another myth about gold... the belief that anyone knows where the heck it's going over the coming years.
Every day, you hear some guru claiming gold is going to $2,000 or $4,000... or even $10,000. Those kinds of price projections are just hot air. Nobody – not Warren Buffett or Ben Bernanke or George Soros – knows how high gold will go in the coming years.
It's tempting to make comparisons to other wild periods like the 1970s or the 1930s. But those historical comparisons aren't worth anything. And I'm going to catch hell for saying this, but they aren't worth anything because this time is different.
I know "this time is different" is a dirty phrase in the investment business – but given the U.S. debt situation, our runaway entitlement spending, Europe's massive debt problems, and the emergence of Asia as a wealthy gold accumulator – this is a different gold market than any market we've ever seen. I don't place any value on any past price action here... or any price projections... or any attempts to value it.
You can't value gold like a stock... where you'd say, "I'll pay 10 times earnings for gold." You can't value it like a rental property and say, "I'll pay eight times annual rent for gold."
The important thing for investors is to forget about the noise you hear on the Internet and television, and just steadily accumulate ounces of gold. Try to buy a little more each quarter or each year.
Don't see it as an investment. See it as money... as real wealth you can hold in your hand. That's how it's been seen for thousands of years. The general public will eventually rediscover it in the coming years.
Stansberry Research: Thanks for your time.
Hunt: My pleasure.
Editor's note: As Brian explained, gold can serve as a form of crisis "insurance." As stocks, bonds, and other assets fall during times of chaos, gold prices rise.
But the biggest gains could come from gold stocks... As gold soars in value, the companies that mine gold are likely to soar even more. That's because when a natural resource doubles, triples, or quadruples in price, the profit margins of the companies that produce that resource can skyrocket. For example, from 2002 to 2008, when gold prices rose from $300 to $1,000 per ounce, gold firms Kinross Gold and Yamana Gold each rose 1,000%-plus.
That's why it can make sense to make gold stocks part of your "wealth-insurance" portfolio. But if you're going to buy gold stocks, you must know what you're doing... and there is no better guide than John Doody and his Gold Stock Analyst advisory. John is the best in the business. During the financial crisis from 2008 to 2010, his proprietary trading strategy outperformed gold prices by 11 TIMES... turning every $5,000 into more than $50,000.
And until Tuesday, you can sign up for Gold Stock Analyst at a HUGE discount to its regular retail price. Get the details here.