Consider spokesman before joining the gold rush

By DAVID MOON, Moon Capital Management, LLC
November 15, 2009

Famed Watergate burglar and current radio talk show host G. Gordon Liddy is on television every day proclaiming the virtues of investing in gold. The appearances are paid advertisements for a company that sells gold. Surprise, surprise.

It’s difficult to turn on the television or radio these days without hearing some celebrity – often a conservative talk show host – trying to convince people to buy the stuff.

In almost every culture, there is a fascination with this metal, especially during times of economic peril.

In 1980 I had a teacher who said that gold should be a part of every investor’s portfolio. He recommended at least ten percent of a person’s financial investments – ideally more – should always be committed to the precious metal.

Approximately 80 percent of the world’s gold production is used in jewelry. Other than that used in Valentine’s Day presents and wedding bands, gold is taken out of the ground in South Africa, put on a boat, shipped to the United States, then put back into the ground at Fort Knox.

If I am going to commit any money to an asset in anticipation of financial Armageddon or hyperinflation, I want to own a commodity that does something. Ideally, I would own a commodity that is consumed, like natural gas, silver or wheat.

Most gold that is mined simply adds to the world’s accumulated inventory, sitting around in jewelry and safe deposit boxes.

Since September 1980, the price of gold has increased a total of 57 percent. The Dow Jones Industrial Average has increased 989 percent.

Economist Stephen Harmston writes that in 500 BC, an ounce of gold could be exchanged for 350 loaves of bread. At the current price of $1,100, that same ounce would buy more than 600 loaves of Merita bread at a Knoxville Kroger. Only three years ago, gold traded at the “bread-equivalent price” of only 350 loaves – the same level as 2,500 years ago.

The current appeal of gold is easily understood. People chase the most recent winners. It’s the same reason that each January folks move their 401(k) money into last year’s best performers.

There is a reason someone is spending millions of dollars on advertising aimed at selling you gold. The ads work. Of course, if those companies really believed that the key to riches was in owning huge collections of gold, why would they waste their money on purchasing radio advertising? Why not use that money to buy gold? Instead, these companies are selling gold – not buying it. And they want to sell it to you.

Be cautious if you’re thinking about investing in something that has doubled in price in a very short period. Be extremely cautious if the poster boy for that investment strategy is Gordon Liddy, a guy whose resume includes devising plans to bomb the Brookings Institute and kidnapping anti-war demonstrators. That’s not a typical resume for an investment advisor.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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