Richard Wiggins trashes gold in Barron's

In this weekend's Barron's, Richard Wiggins of First Michigan Bank (a bank buying up failed banks from the FDIC) trots out the usual anti-gold arguments.

I'll quote and respond to the key points.

Gold may be the "currency of last resort," but premiums on gold coins have soared to levels never before seen. One-ounce coins are now trading far above their bullion value, as people continue to chase them, and mints worldwide are unable to keep up with demand.
Wrong. Premiums at my local coin shop are still $50 - $60 over spot. Given gold's rising price, that's a 4% or 5% premium, much lower in percentage terms than it was a few years ago when the dollar premiums were the same but spot was a third lower. Reports of Greeks paying $1700 an ounce are entirely a local phenomenon, and only illustrate that you want to buy gold before the panic, not during the panic.

Even gold bulls you may have seen on CNBC or Bloomberg will admit that there is a $200-$300 premium in gold because of ETF gold funds.
This is an asinine argument. Some people prefer to hold physical gold, some use futures, and some use ETFs. The same thing is true of stocks and bonds. Is there an irrational premium in stocks because a lot of people hold them through ETFs?

But gold is a special commodity. Virtually every ounce ever mined -- whether for use in jewelry or anything else -- is still around. It doesn't rust or decay, and we keep mining more each year. It's not like oil, which we use up.

But land is a special commodity. Virtually every square foot ever discovered -- whether for use in agriculture, industry, or residential -- is still around. We can even create more each year, as with Dubai islands and Japanese airport islands. It's not like oil, which we use up. Permanence does not imply worthlessness.

Another part of the logic for gold-that whole flight-to-safety thing -- doesn't exist anymore. Maybe once upon a time, gold was a handy way to buy passage out of an oppressive country, but not anymore. When everybody obsessed about gold, and it was highlighted as a great doomsday hedge against inflation and currency risk, financial futures didn't exist.

Excuse me? With Greece in collapse and the United States at unprecedented total debt-to-GDP levels, suddenly there's no more reason to fear oppressive or confiscatory governments? Only two years ago, Hank Paulson threatened Congress with martial law and a total collapse of the financial system if he didn't get his bailouts, but now we're supposed to believe everything is so stable that we can trust our lives to Wall Street financial futures?

[...] gold is a third-rate safe haven: It pays no interest and costs money to insure. (Textbooks say it has a "positive cost to carry.")

It pays no interest? Anybody check out the interest rates on Zimbabwe Ben dollars lately? What's the difference? As for costing money to insure, safe deposit boxes generally available for free to bank customers can hold plenty of gold. If you don't trust your local bank, you can bury some deep in your backyard or leave some with trusted relatives overseas.

The big argument for gold is that all of the money that the Federal Reserve is printing -- 18 years of easy money -- will come back to haunt us at some time when inflation comes roaring back. Yet if today's investors are worried about U.S. inflation, they can go out and sell T-bonds, or buy the euro or another currency and earn interest while they're doing it. Investors afraid of 1970s-style inflation also should be buying Treasury inflation-protected securities.

Shorting T-bonds relies on the same financial system we were warned was on the verge of collapse just two years ago, and none of the structural problems have been addressed since then. Buying the Euro or other currencies? Hilarious -- as if the U.S. is the only country printing money! Treasury inflation-protected securities? They use the CPI, which the government can manipulate at will.
Gold is just another fiat currency. The only reason gold is valuable is that we believe it is valuable. Ultimately, this gold bubble ends in tears. When and how far gold's price will decline is anyone's guess, but a smart bet is "sooner rather than later."

The dollar is just another fiat currency. The only reason the dollar is valuable is that we believe it is valuable. Gold would be as worthless as dollars except for one thing: scarcity. The difference between gold and the dollar is that a limited quantity of gold exists (both mined and waiting to be mined), while the Federal Reserve's ability to create dollars out of thin air is absolutely unlimited. Ultimately, this dollar bubble ends in tears. When and how far the dollar's price will decline is anyone's guess, but a smart bet is "sooner rather than later."

I'm not saying gold won't be volatile. In fact, I'd love to see a decline below $1000 which I'd use to load up more. But in the long run, with no end in sight to America's insane fiscal and monetary policy, betting on a dollar decline looks like more of a sure thing than a gold decline.


Fazsha said...

I can't really say any more about Richard Wiggin's propaganda article than you've already said. It was a transparent attempt to shoo people away from gold. The only tears I've seen so far are on Richard Wiggin's face. Apparently this is his first article anywhere on any subject. Way to show your ignorance, Dick.

Anonymous said...

I wish I would have bought gold in 2005 as opposed to the house I did buy. After 5 years , I estimate that dollar value of my house has declined by 10% to 15% - at least i hope that is the extent of my loss. During that time I have had the cost of insurance , taxes and repairs. At least i paid cash and id not get a mortgage.

What has gold done in the last 5 years? Only increased in dollar terms by 270%. It is true that if I had bought gold with my money I would have not been paid interest, but the same can be said of BRK-A.

Don't get me wrong I like my house but it is not the equity building investment that all the experts said it would be . Instead it seems more like a glacier be subjected to global warming. The much lesser amount of dollars I have put into gold has made up some but not all of the loss. I posted anonymously because I don't want to open another account

Anonymous said...

There is no fundamental value for gold other than what some other sucker will pay. At least your house provides some shelter.

The best anti gold argument is that only a small % of gold consumption comes from gold hoarders. If the shy really hits the fan, 80% of demand will drop and all those products previously made with gold will come off the shelves and flow back to the hoarders.

Anonymous said...

Hey, it's me Rich. I am the Head of Risk for the Saudi Arabian Oil Company. What happened to gold? it FELL.

W.C. Varones said...

Hi Rich,

I think you're holding the chart upside down. At the time of your article, gold was about $1200 an ounce. Now it's $1330.

Congratulations on your position as head of risk.

WCV said...

Did your 2010 gold call come up in the interview process?

Nailed it

Twitter (X) : To be fair, though, I thought they'd come up with someone more appealing than Cackles Harris.