(10/14/13) Gold: "It's Not Money"

Conventional wisdom says that gold is a safe haven. They say that, as threats to the economy and the value of the US dollar increase, people buy gold to protect their wealth, observes Briton Ryle in Wealth Daily.

So it would seem to make sense that, with the government shutdown in full effect—and no resolution on the horizon—gold prices should be higher.

It's time to get real about the price of gold, and why it is where it is. If you bought gold in 2011 or 2012 or 2013, you are losing money. You could be down as much as 32%.

And if you bought gold mining stocks, the situation is even worse. Barrick Gold (ABX) hit $50 a share in 2011. Today, it's around $18. Newmont (NEM) made it to $70. It's down 61% since. Earnings for Newmont are expected to be cut in half this year. Analysts say earnings will fall another 7% next year.

The trend in the gold market is not good. And there's no reason to think it's going to get better. I want to be clear about this: I don't have an axe to grind against gold. I don't cheer when the price goes down. And I'll gladly trade it when it rallies. But I also hold no illusions about the yellow metal.

Gold has no intrinsic value. There's no law or rule that says gold is worth a certain amount of money. Gold doesn't pay a dividend.

This is an important point: Gold is not money. And in fact, it's not going to be money any time soon. Now, that's not to say—gold isn't worth anything. It's clearly worth something. In fact, gold has a long history of being worth something. The problem is, it is impossible for us to say exactly what that something is.

My point is simply that there's no reason to think that the something that gold is worth today will be more tomorrow.

Like most assets—and gold is an asset—it is worth what someone else will pay for it. The same is true of art, wine, used cars, and growth stocks. Now, I might spend $1,000 on a painting because I like it. But that doesn't mean I'll be able to sell it for $2,000.

Just because gold was $1,700 an ounce two years ago has absolutely no bearing on its price today (though, truth be told, the decline is more likely to be self-perpetuating as gold bulls give up or capitulate to the relentless downward pressure).

Have you seen a long-term chart of gold? It looks awful. Gold traded below $800 in 2009. In 2005, it was under $500. And as gold prices fall, the situation will get worse.

Gold-oriented funds will fail and be forced to dump assets. Gold miners could fail, as sale price can no longer cover expenses. And investors may start to unload gold stocks, bullion, and coins, to prevent losses, thereby pushing prices even lower.

Right now, the value of gold is very much in question. Of course, we could say the same thing about a growth stock like Amazon.com (AMZN).

How can a company that lost money in two of the last four quarters (and is expected to lose money in the current quarter) trade with a forward P/E of 115 and carry a $317 share price?

I sure wouldn't buy it. I get the fact that Amazon has posted phenomenal growth. I can see that the company does $66 billion in annual revenue; and I fully see the potential that Amazon has, as the dominant Internet commerce Web site. Analysts expect Amazon will turn a $1.2 billion net profit in 2014.

But the problem with Amazon for me, is that there isn't enough certainty about what the company is worth. I much prefer the certainty of a company like Ford (F), which I recommended here a couple weeks ago...

I can easily understand Ford's business model. I can calculate that in 22.5 years, Ford's 2.3% dividend will completely recoup my investment.

What's more, I can see that Ford is only paying out 20% of earnings as dividends, so there's plenty of room to raise the payment. So, I can reasonably assume that my initial investment will be returned in less than 22.5 years.

With a forward P/E of 9.7, I can judge that Ford is undervalued and may have 20% upside in the next 12 months. That's the kind of certainty I demand in an investment. Unfortunately, gold just doesn't have it.