This is my personal blog. Travel, financial and political observations. Notes to myself and my friends. Content development for my monthly newsletter, Porter Stansberry's Investment Advisory (www.stansberryresearch.com).

Wednesday, April 12, 2006


Gold is the only major commodity that isn’t produced primarily to be consumed in the economy – like iron, copper, pork bellies, or oranges – but simply to be owned and admired. It is too heavy, soft and rare to have many practical uses outside of electronics and dentistry. Yet it is one of the earth’s most prized objects, valued mostly because it is considered valuable.”

  • E.S. Browning, The Wall Street Journal page A1 April 12, 2006

Did you notice the circular logic? Gold is valued because it’s valuable.

How insightful...

There’s no other way Browning and his editors at The Wall Street Journal can describe gold’s utility. They look at the metal curiously, the way a dog looks at a carrot.

Mmmnnn, they ponder.

They describe gold’s unique attributes – the things that make it perfectly suited for use as money – without acknowledging any of them. In fact, to the Journal, these attributes are weaknesses. It’s too rare they say. It's too soft they say. It isn't consumed by industry they say.

They don't mention that its softness means it can be divided easily. They forget to mention entirely that it never tarnishes, which makes it a unique store of value. And, that gold doesn’t have any industrial uses means it's also in ready supply: all the gold that's ever been mined is still on the market...at some price. It’s timeless, eternal, and isn't someone else's liability, much unlike today’s paper money.

The Journal doesn’t mention any of this; in fact, the Journal doesn’t even reference the historical role of gold in the economy (as money) at all. Not once.

Late last year I met with about a dozen of the top private equity firms in New York, Boston and D.C. I was trying to buy another, large publishing company. I needed to borrow $70 million. It's funny. I had a hard time getting a $300,000 mortgage to buy a brand-new home on a piece of water-view property in downtown Baltimore that's easily worth far more than $300,000. But private equity firms were ready to hand me $70 million, to buy a business with no earnings and little tangible assets. Go figure. Our deal fell through, by the way, as the target company's share price ran away from us. Still, I have a feeling private equity investors are going to get what that deserve from these firms...not what they expect.

Case in point: gold.

During each meeting I usually made a point of mentioning that we publish research about gold and that we consider gold to be the only real money. I’d show them a promotional letter we published three years ago about the “secret currency” – which is rare gold coins. Each time gold came up in our meetings, these highly educated extremely polished money managers couldn’t hide their smirks or stifle their guffaws. Most of them openly laughed out loud. They certainly didn’t have any investments in gold mines, gold bullion or rare gold coins.

They will. Soon. And they won’t be laughing about gold anymore.


Epilogue: I distributed an earlier draft of this post to a close circle of friends and business contacts. Rick Rule, who has been the leading investment banker to the resource industry for more than thirty years, replied with the following comments about private equity managers.

"Wall Street hubris leads these morons to believe that they can master or hire the expertise appropriate to a wide variety of tasks, despite a historical track record unblemished by success. The set of circumstances that make me think exposure to bullion is neccessary, economic slowdown, monetary instability, political and social corruption, will decimate the cosy, mundane world of private equity, particularly given the balance sheets of the resultant entities.The Wall Street guys are very wise to ignore the gold and gold equity markets; those markets devour the uninitiated. These same Wall Street guys will become involved, to their clients chagrin, eventually [at the top of the market]."


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