My Two Cents - "Why the Public isn't buying Gold"

11/23/2006

Mainstream Americans at the time bought gold as an inflation hedge, and because the price was skyrocketing. It was the diamond in the rough, the rose among a host of thorns. Gold is certainly not immune from the speculative manias that often end bull runs in stocks. This was proven as inflation receded somewhat and gold lost its luster. The fundamentals were forgotten and holders of the yellow metal fled to the exits. We saw a awful bear market in gold from around 1982 until the late 1990's, which, ironically is the same time we saw the huge bull market emerge in stocks. Instead of spot (prices), we were looking at dot in the form of dot-com stocks. The mindset of the American investor changed from that of protection of wealth to pure accumulation and speculation. We paid dearly for that abandonment of fundamentals as the dot-com's crashed down around us, ripping billions from the portfolios of average investors.

So the big question becomes why hasn't the public re-embraced gold as inflation, oil prices and interest rates have all climbed recently? Surely I couldn't make the argument that the public is now once bitten on God's money. If that were the case, the stock market would be quieter than a funeral in your local library. The stock market has bitten us many times, yet we still run back and with increasing fervor. Why not then to gold?

There are several obvious reasons that I can list, among them being that the average person lacks an understanding of how to buy gold or that buying gold is even an option. In other words, if you want to buy gold, you have to actually go out and research how to go about doing it. It is not as simple as calling your stockbroker. The one exception to this is the gold ETF (ticker: GLD). And as far as calling your stockbroker goes, I tried this a year and a half ago when gold was at $450 and was given a resounding 'no way' on whether or not I should invest. As you can probably imagine I disregarded that advice, and even the recent move up notwithstanding, my purchasing power is more secure because of it. Realize I am speaking in very general terms here; I am sure there are exceptions to these observations. To test my perception though, I asked 10 people at random and only one person even knew it was legal to own gold. The rest remembered that the government had called in the gold in the 1930's and still thought that condition existed. The one person that knew it was legal to own gold had absolutely no idea how to go about purchasing it.

Secondly, gold cannot be easily purchased directly into retirement accounts where the bulk of our saving occurs. Again, there are mechanisms for holding gold or numismatic coins in your IRA/401(k) (aside from the ETF), but they are not well known among average investors. There are only a limited number of brokers who offer this service, and there are usually fees involved above and beyond those involved with holding stocks and mutual funds. So again, access is a problem. And as with buying gold outright, traditional brokers don't seem to be recommending it unless it is via a hedge fund or the gold ETF.

Lastly, and most importantly, people lack the savings with which to purchase gold. The savings rate in the US has been negative for many months running and I find it very unlikely that the average investor will dip into the savings they still have to buy gold even though it may be a prudent thing to do. It seems even more unlikely that these same folks would be willing to swipe their credit card or take out an equity loan to buy an investment that they don't really know exists. Wall Street and the financial media have done a masterful job of scorning gold because it 'doesn't pay a dividend'. Hey Wall Street - check your NASDAQ stocks and tell me how many of them pay dividends. At the very least, gold will preserve purchasing power. It has been a store of wealth for thousands of years; much longer than any stock or fiat currency and its monetary attributes are second to none.

Once again the problem seems to be imperfect information. Some people have the information and have used it for profit and protection. Others lack the information and thus are left hanging. If you are interested in acquiring gold, go to your favorite search engine and type in 'how to buy gold' and you will get hundreds of informational websites, dealers and the like. If you would like more specific information feel free to contact me via my website www.my2centonline.com and I'll be happy to share my thoughts on gold and other wealth-preserving investments. As always, this information is provided free of charge. In the meantime, I would like to wish you and your family a restful, relaxing and happy Thanksgiving.

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.