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Newsletter – January / February 2012 – Gold bug logic

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Gold bug logic

In 1975 when I joined with Merrill Lynch Canada, US President Nixon had recently signed a bill permitting Americans to invest in gold. US citizens had not been able to openly invest in gold since the 1930s, when it was pegged at $35 an ounce. In the1970s, gold bulls were bewailing the US Dollar as fiat currency and gold as the safe haven alternative. Gold moved rapidly from $35 to $100 an ounce. Now, thirty seven years later, gold has risen to over $1600 an ounce and gold bugs continue to tell the same fiat-money stories. On the surface, it appears that they were absolutely right! The US dollar IS in trouble and gold IS going up. But, as usual, the devil is in the details. Gold has gone from $35 (1930s to early 1970s), up to over $800 (1980), then back down under $300 (1999), up to $1900 last year. In that 19 year period from 1980 to 1999, gold bugs were losers. During the 19 years from 1980 to 1999, their story stayed the same and they became losers. Today, they are winners. From 1975 to 1980, they were winners.

It reminds me of the financial planning industry. They too have a never-ending story: financial planners are trained to believe in the stock market and in American capitalism. Their master plan for the stock market is “buy and hold for the long term.” And they have been telling this same story for as long as there have been mutual funds. At first it seems quite boring. But if you look beneath the surface, a fascinating pattern arises.

The financial planners’ continuing theme is the exact opposite of the gold bugs’. One group, the eternal optimists: the other, gloom and doom pessimists. If we compare the performance of gold in the periods mentioned above, to the performance of the Dow Jones Industrial Average in those same times, we see that when one does well, the other does poorly. From 1975 to 1980 when gold was going well, the Dow Jones Industrial Average went nowhere, bouncing along under 1000. From 1980 to 1999, gold eased down from the high 800s to under $300 while DJIA rose from under 1000 to over 11,000. And for the last 12 years, gold has soared and US stocks have been mediocre. The beat of these two drums seems exactly opposite.

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