Monday, February 11, 2013

Problems with Erb and Harvey's "The Golden Dilemma"

The current issue of Barron's carries a brief article by Mark Hulbert tited "5 Reasons Not to Buy Gold" (LINK).  It is a review of Claude Erb and Campbell Harvey's January 2-13 artcle titled "The Golden Dilemma".  This long study is downloadable for free (LINK).  I also came across a CBS writeup of what might have been an abstract of this study from last year (LINK).  Some of the comments to the CBS piece are interesting.

In any case, I am halfway through the Erb/Campbell study.  It is clear they miss the main point, and so does Mark Hulbert, who is a friend of gold, apparently. 

Gold is no longer able to brought cheaply out of the ground.  In this, it is like oil. 

When President Nixon de-linked gold from the dollar, the price had been fixed at $35/ounce.  A mainstream commentator, Eliot Janeway, asserted that because gold was being mined in South Africa at  very low cost, the price would plummet.

Similarly, it was reported during the Libyan intervention and civil war that oil from rich field in or just offshore Libya was being brought up from the ground at one dollar per barrel.  

Both gold and oil are being priced much closer to the marginal price of discovering, producing and refining the substance than Messrs. Erb and Campbell realize.  Oil was $3 in 1970; gold on the free market was about $42-44.  Each has risen similarly since then, about 35-40X.  Yet only gold is considered wildly overpriced.  Hmmm... 

The other major error in their study is their trust in the CPI.  They show the CPI over decades without appearing to care that it has repeatedly been redefined lower.

Finally, they appear to endorse the idea that gold, and essentially only gold, preserves wealth over multi-generational time frames.

Gold dropped a little over 1% today.  If it were because of the Hulbert piece, I will bet that once the Chinese get back from their New Year holiday, they will not care about the Hulbert piece in Barron's.


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