David Frum, who hands out poor political advice, apparently thinks he's an investment guru too! Unfortunately, his investment advice is every bit as bad as his political theories.
Here's why:
David Frum: Beware the gold bug
That bubble has now arrived ... It’s gold.
The price of gold has zoomed past US$1,000 an ounce, reaching an all-time record of US$1,070 on Wednesday. Suddenly, talk radio and cable television are jammed with ads urging small investors to buy coins ...
Gold is a strange investment vehicle. If the typical small investor were to hear a pitch for investment in copper, zinc or molybdenum, he or she would probably react negatively ... But if the metal is gold, suddenly everybody wants to play.
So far, Frum has said nothing of relevance, just stupidity. A "strange investment vehicle," really? Gold has been called a lot of things, but strange? Let's see what else our investment guru Frum has to say.
People think of gold not as a metal, but as an alternative form of money. $1,000 worth of copper will weigh as much as a sub-zero refrigerator. Molybdenum makes a lousy Christmas present. Gold is sold in coin form, and looks and feels like cash.
Unfortunately, also like cash, gold yields no return. If you put a roll of coins in a safety deposit box, a decade from now you’ll have the same roll of coins — and in the interim, you’ll have paid 10 years’ rent on the box.
That may be a price worth paying for a hedge against inflation. At today’s prices, however, investors should ask themselves some hard questions about how real the inflation risk is — and how much it is worth paying to insure against that risk.
People buying gold, are not buying it as an "alternative form of money." They're buying it as a safe store of value for their savings. In other words, they don't want to lose their wealth! You can throw me into the "gold bug" camp too. I certainly don't picture myself carrying a pocket full of gold as I run up to the grocery store.
Frum is simply throwing up a straw-man argument. He actually believes investing in gold is political. How else can you explain such absurdity?
Now let's take a look at his gold vs. coins in a safety deposit box for 10 years analogy. Let's say we put $100 of coins in one safety deposit box and $100 worth of gold in another back in 1999. Today it's been 10 years, so we're going to open those safety deposit boxes and use the contents to buy stuff.
Of course things cost more today than they did in 1999 (inflation), so unfortunately, we won't be able to buy as much with the $100 in coins as we could have back in 1999.
Will our gold deposit buy less today too? Of course not, because the price of gold, like everything else, is higher as well. So we can actually buy more with our gold today than we could back in 1999.
What Frum fails to understand, is that the most important priority is to preserve your purchasing power.
Most U.S. indices continue to warn of deflation ahead, not inflation.
Consumer price indexes are dropping, not rising. Average weekly wages are dropping too. For the first time since 1975, there will be no cost-of-living increase in U.S. Social Security payments to retirees.
Of course the government has found a way to renege on its social security promises. The only thing this proves, is that government, by nature, is corrupt. People don't buy an index either. They buy products and services.
There is no deflation.
Deflation is a decrease in the money supply. The federal government has acted to prop up our falling markets through bailouts and spending sprees. To pay for this, they have created inflation!
Take a look at the following chart from the Federal Reserve Bank of St. Louis.
Maybe your eyes are better than mine, but I sure don't see a decrease in the money supply. Do you? Because I see the exact opposite, a nightmarish increase in the money supply.
Consumers are saving more and spending less. Spending has dropped at the fastest rate since the Second World War. Savings rates have jumped.
Demand is dropping for just about everything consumers buy. On the supply side, meanwhile, labor will be in excess supply for years ...
In such an environment, how are prices to rise?
Here Frum proves he's not an economist. He believes that prices on consumer products will fall due to lower consumer demand. He may be right, but consumer products are not money.
For example, computer prices fall all the time. Chip efficiency increases, manufacturing facilities improve, software becomes more accessible ... Yet nobody's crying foul about "computer deflation." That's because computers are not money.
Gold buyers insist that prices must rise. They argue that there is something fundamentally unsound about paper money ... It becomes an ideological protest against the consumer-led modern economy ...
But what we are seeing now is not a protest. It’s a stampede. The market stampeded into stocks in 1998, houses in 2005 and now gold in 2009. The stampede leaders whooped for everyone to follow — and then quietly made their escape before the crash. It’s happening now again with gold.
Sell your gold — and buy a foreclosed condo in Florida.
Poor David Frum, he doesn't even understand his own advice ...
If we were truly in a deflationary situation, buying a "foreclosed condo in Florida" would be a huge mistake. If he were to take his own advice, Frum would be selling his current home and looking to rent! But I don't expect Frum to understand serious investment advice.
Speaking strictly in trading terms, gold isn't even close to a new high. In real terms (based on CPI), gold would have to hit around $2,400 an ounce to constitute a new high. Add real inflation to the mix, and $2,400 becomes extremely low. So in a bubble, gold is not.
There is no protest. After all, it's hardly a secret that the government has been inflating the currency. While there are people who do speculate in gold, most people who choose to accumulate their savings in gold, do so because they believe they'll lose purchasing power in traditional investments like cash and bonds.
And paper money is fundamentally unsound. What else can you call something the government can counterfeit at will? Well ... fraud is a good word to use.
P.S. - Matthew Yglesias flunked economics too.
