The Rise and Fall of Gold

By: 
Al Jacobs

In case you are not paying attention, the marketing of gold as an investment is a frenzied exercise. Rarely does an hour elapse when some radio talk-show host is not making a pitch for the “only precious metals firm he trusts.” And you cannot ignore the infomercials where an anointed authority predicts the values of gold and silver to be headed for the sky, meaning “… you must buy now while it’s still a bargain.”

Perhaps a bit of background information will give you a better idea why precious metals – particularly gold – are now marketed with such enthusiastic fervor. Over most of the past half-dozen years or so, the going rate for a troy ounce of gold, known as the spot price, hovered in the $1,200 to $1,400 range. However, upon the appearance of the coronavirus in early 2020, an increased demand for the metal became apparent.

With gold’s value at $1,525 on March 23, 2020, and institution of governmental action to combat the virus, the metal’s spot price rapidly rose. Over the next four-and-one-half months, gold’s price escalated as if it would never cease … until Aug. 6, 2020, when it topped out at $2,067.45. This occurred one full year ago and since then it has been slowly declining.

On this 19th day of August 2021, I note its most recent quotation at $1,781.45. And understandably, a falling value of a prospective investment is not an encouraging justification for its purchase. If the metal is to be successfully marketed, it must be done vigorously and convincingly.

Perhaps you can predict what rationales are used to convince prospective investors that gold is a suitable speculation. You need only visit the websites of several gold marketing firms to see what they say. The following statements are what you’ll find: “Unlike paper currency, coins or other assets, gold has maintained its value throughout the ages.”

Here’s another: “Gold is an excellent hedge against inflation, because its price tends to rise when the cost of living increase. Over the past 50 years investors have seen gold prices soar and the stock market plunge during high-inflation years.”

And yet another: “With the government now in the process of spending beyond its capability, the nation is about to be drowned in inflation. Our economy is a house of cards; only gold will guarantee your preservation of wealth.”

Now, before I go any further philosophizing about the probable ways gold marketing firms may attempt to romance their prospective clients, it might be better if we actually viewed one of their sales presentations. I happened to spot a most impressive full-page color newspaper advertisement a few days ago … so we will analyze it to see how this particular company chooses to inspire its prospective purchasers.

The firm is American Gold Reserve (AGR). A quick check reveals this to be “a new multilevel marketing company based in Utah that just launched.” It is owned and managed by Old Glory Mint – in business since 2009. AGR’s mission is “to put as much gold and silver as possible into the hands of as many people as possible, as easily as we can, and at the lowest possible price.”

The items promoted are U.S. coins known as $5 Gold American Eagles. Issued since 1992 and containing one-tenth of an ounce of pure gold, virtually all are readily available at prices near spot value.

AGR’s advertisement is most impressive. Its heading reads “FINAL RELEASE, Limited Offer, Government Gold at Cost.” Their pitch is much as might be expected.

 “American Gold Reserve announces special, incredibly low pricing on official U,S. government issued gold coins from the United States Mint. While supplies last, American Gold Reserve is offering you the opportunity to purchase Gold American Eagle Coins at the low price of only $225 each – completely free of any dealer markup.

“These gold coins are fully backed by the U.S. government and are official U.S. legal tender. If you have been waiting to enter the market, this is your chance to join the thousands of Americans who are protecting their wealth with precious metals.”

I will now provide the vital information omitted from the AGR offering. They never disclose the weight of or the current spot price of the coin’s gold. They fail to explain that as legal tender, the government’s “fully backed” obligation amounts to five dollars per coin.

Nor do they provide a calculation indicating, at the current spot value of gold, each coin contains one-tenth of an ounce of the metal worth $178.14 – calculating out to be $46.86 less than their clients’ purchase price. And finally, AGR does not justify how they can be offering “Government Gold at Cost,” followed up with their claim “low price is completely free of dealer markup.”

Just so you’ll know, I’ve systematically reviewed sales promotions of precious metal firms for the past quarter century. Rarely if ever are the offerings even reasonably forthright – and there’s a valid reason for this. The vast majority of prospective gold investors are woefully unknowledgeable about what they are investing in. If they actually understood what they were doing, they would, in most instances, avoid all precious metals investment. Thus, the offerings must be duplicitous if the firms are to exist at all.

When it comes to the way products are promoted, there are a few comments I wish to make concerning advertising techniques. Since the field of marketing became a major industry in the United States during the 1920s, the practices of deceptiveness and exaggeration became universal.

Furthermore, I contend many otherwise reputable businesses are essentially so detached from whoever is responsible for their firm’s marketing practices, they are unaware of how disreputable they may appear to the general public.

This, however, is not the case with the precious metals dealers; they know exactly what they are peddling and how it is being accomplished.

Admittedly, gold has value. It’s an attractive metal that doesn’t easily tarnish, explaining why it’s been used as a decoration for centuries. In addition, it has long enjoyed universal acceptance as the basis for monetary backing, thereby imbuing it with an allure of indefinable worth. It is these properties which cause it to be accepted into the public’s imagination and thereby be effectively marketed.

With this said, let us take a closer look at the subject of investment to see where and how gold fits in. It’s my belief an investment must fulfill two criteria. First and foremost it must possess a clearly predictable income flow. The interest paid on corporate bonds and treasury notes meets this requirement, as do dividend payments on common or preferred stock. Secondly, it must possess a rational basis for assigning value, which is what appraisal is all about. Gold does not satisfy either requisite.

I’ll conclude with these observations: Gold may on occasion generate a profit, but there’s no way to anticipate when. Despite recommendations to the contrary, there is no sound justification for investment in it, whether as the base metal, the specie, or stock in related companies. It generates no cash flow and its basis of value is illusory.

The market for gold long ago entered the pseudo-religious realm, with adherents extolling their virtues, much as with Scientology or transcendental meditation. These markets are, by their nature, subject to manipulation; performance cannot rationally be predicted.

A final comment: A friend once asked me what I thought of gold as an investment. I gave him the following response: “Gold is not an investment. At best it’s a speculative commodity.” Many years have passed; my opinion is unchanged.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. Al may be contacted at al@abjacobs.com.

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