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Johnson: Why Gold Is Not a Bubble

Ivory Johnson |Scarborough Capital Management, Inc
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Investors are justifiably concerned about being hoodwinked three times in ten years. Without question, extravagant returns enjoyed by the precious metal are well received, but the potential hangover from yet another bubble deprived of air, and the associated shame, would take several years to subside.

The chorus of anti-gold rabble-rousers find themselves in some type of losing streak. Experts have predicted the demise of gold for roughly four years now, a period when gold has outperformed the S&P 500 by over 125 percent. Missing the first leg of the rally is one thing; forgoing a 250 percent return in just six years is an entirely different story.

It’s been said that gold holds no intrinsic value, that it’s only worth as much as investors say it is. Perhaps, but investors are fully aware that Congress spends money and debases the currency with the willful indifference of a well heeled con man selling the American dream to a public that’s been fast asleep for years. As paper money becomes increasingly diluted, gold reciprocates accordingly, increasing its value in dollar terms.

There was a time when the hedge funds were poised to pull the rug from witless retail investors and cause the collapse of gold. Once again, George Soros, formerly the sixth largest owner of gold, sold 99 percent of his positionsin (GLD) and marginalized our new millennium naysayers. Investors may have braced for the next shoe to drop, but the wily George Soros used the proceeds to buy mining stocks. Meanwhile, the bullion ignored the apparent slight and significantly outperformed the market.

What exactly would make the price of gold fall off a cliff?

History tells us that there are no reasonable means by which any dominant republic can maintain a debt to GDP ratio comparable to that of Portugal, an entitlement system to rival our socialist friends in Europe and an overwhelming military presence that would make Romulus Augustus, the last Roman Emperor, roll over in his grave.

Investors believe gold is a bubble because to endorse it as a means of wealth preservation calls into question everything about this country we have ever been taught. It would be an admission that there’s a chance, however small, that we’re headed towards a series of events so catastrophic, and with such alacrity, that it’s easier to pretend that nothing at all has gone amuck. So instead we cover our eyes with antiquated statistics and listen to boastful claims of invincibility to make us feel good, just one more economic recovery, anything to make the boogeyman go away.

Gold represents the $14.4 trillion of debt, the $1.5 trillion budget deficit and an unsophisticated money laundering operation disguised as Quantitative Easing . And now, with the debt ceiling debate in complete disorder, our soiled laundry exposed for all to witness, there are still those who doubt the merits of owning a hard asset that cannot be easily reproduced. When you get right down to it, gold is nobody’s bubble; it’s the unregulated counter-party to three decades of conspicuous fiscal incompetence.

Ivory Johnson is the director of financial planning at Scarborough Capital Management, Inc. He is a Certified Financial Planner, a Chartered Financial Consultant and a frequent guest on CNBC. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance.

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