Wednesday, December 22, 2010

Doug Kass On Gold As ‘The Emperor's New Clothes’

Investment manager Doug Kass predicts that gold will plummet in 2011 by $250 or about 17-20% from current levels.

He writes,

Surprise No. 9: The price of gold plummets by more than $250 an ounce in a four-week period in 2011 and is among the worst asset classes of the new year…

My surprise is that next year the price of gold has the potential to become the modern-day equivalent of Hans Christian Andersen's "The Emperor's New Clothes," a short tale about two weavers who promise an emperor a new suit of clothes that are invisible to those unfit for their positions, stupid or incompetent. When the emperor parades before his subjects in his new clothes, a child cries out, "But he isn't wearing anything at all!"

With a finite supply, gold has historically been viewed as a tangible asset that increases in value during uncertain (and inflationary) times. No wonder it has become such a desirable asset class following the Great Decession and credit crisis of 2008-09. Gold bugs remind the nonbelievers that for thousands of years, gold has been a store of value and, given the current state of the world's financial system, gold is the best house in a bad neighborhood of asset classes.

But gold, which may be the most crowded trade around, is viewed now as a commodity for all seasons -- during inflation, deflation, low or high economic growth.

There is a body of thought that maintains gold holds little intrinsic value, that it is only a shiny metal with limited industrial value that throws off no income or cash flow (and, as such, its value cannot be determined or analyzed with any precision based on interest rates or any other measure).

Mr. Kass argues that gold has been rising out of misplaced faith or equivalent to a “religion” (with reference to gold bugs), which apparently has been spreading like wildfire.

When we say people adapt a faith or religion based outlook, this extrapolates to fundamental evidences being discarded in favor of a desired outlook or outcome. In short, a form of rational ignorance or deliberately sidelining information that opposes on one’s belief.

Here Mr. Kass parrots the mainstream view that gold has little intrinsic value (commercial value) even while citing the role of gold as money for thousands of years which of course is a self-contradiction.

Mr. Kass does not mention how and why gold, among many other commodities and the paper money system as competition, emerged as money for thousands of years. And this would be similar to abandoning evidence or yet represents as another form of rational ignorance.

It is important to remember that one of the most essential functions of the emergence of commodity money is its marketability. And what is seen as marketable is likewise seen as having high commercial value. Of course the other important qualities of commodity money would be its being divisible, durable, recognizable, homogenous, high value per unit and scarcity.

Well I don’t deny that gold may correct given its recent steep rise as no price trends goes in straight line even as gold prices seem to be consolidating at the moment.

But I wouldn’t depend on the dismal track record of Mr. Kass’ predictions, since he also predicted gold prices to fall back to $900 levels for this year, which palpably went to the opposite direction.

And given that most of what he predicted didn’t emerge in 2010: strong US dollar, falling treasury yields, war in the Middle East, retirement of Warren Buffett, Central bank tightening and etc…, most which I rightly argued against, this only goes to show how fatal wrong predictions from a “faith” based analysis can be.

To give credit to Mr. Kass, he had been right that the stockmarket would correct by 10% during the first half of the year. But his overall predictions went the opposite way.

If gold bugs have been blindly bullish, as Mr. Kass alleges, so has Mr. Kass been perfervidly bearish and apparently in staunch denial, which after all, just shows that gold “atheism” can also signify a form of rational ignorance that is likewise cut from the same cloth as with gold bug zealots-dogmatism.

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