I found this heartfelt defense of paper money and electronic blips last week in Barron’s ‘Market Watch” column of 1/10/05. It was written by David Kotok, of Cumberland Advisors, a fixed income money management firm which is a division of regional investment banking firm Ryan Beck & Company. Yes, you guessed it, the stocks and bonds crowd. So why didn’t I just ignore it as more of the same from the banking and brokerage houses, to whom gold is pure un-commissionable anathema?

Well, chiefly because this sort of sniping at gold, while absolutely dead-on accurate back in the strong-dollar 1990s, today seems more like whistling past the graveyard.

It’s not just that gold has outperformed nearly all other asset classes since 2001, nor is it hubris born of our having touted gold during that time. And it isn’t that I enjoy arguing with gold’s remaining nay-sayers. Given gold’s performance over the past four years, that would be poor sportsmanship, and my heart just wouldn’t be in it.

It’s certainly understandable that someone in the bond business would want to throw brickbats at gold. After all, bond prices and gold prices are likely to go in opposite directions over the next few years. And in my humble opinion, it’s not the bond-slingers that are going to emerge from this decade as heroes to their clients.

But the fact that this kind of gold-is-history writing continues to be published, just shows how little awareness of gold there is among the American public. I continue to be amazed that the press, both general interest and financial, still approach the subject of gold as if they were writing the obituary of some aged citizen of old glories who passed away in his sleep.

Mr. Kotok’s writing isn’t untypical of this genre, so just for grins, let’s perform a bit of deconstruction on its central paragraph:

“The governments of the world and their central banks hold huge hoards of gold.”

(Okay, true so far)

“This is a leftover from the days when gold was money.”

(An ethnocentric observation, at best. For most of the world’s citizenry outside of the US and Europe, gold is a store of value superior to the local currencies. In other words, gold is money)

“From time to time they (central banks –ed.) sell a little.”

(True)

“They do not often buy any.”

(False. Research available from the World Gold Council demonstrates that over 95% of central bank sales are to other central banks. The rest goes into jewelry and investor’s holdings)

“Theirs is a political decision.”

(If so, then what do the following two sentences mean?)

“Right now, they seem to be sitting on the sidelines and watching the price. The higher it goes, the sooner they will sell again.”

(That makes it a market decision rather than a political one, doesn’t it?)

Well, I could go on and on with this, but I’ve probably already spent more time on it than Kotok did throwing it together. And oddly enough, I actually find myself agreeing with the conclusion of this mostly anti-gold screed:

“So why has gold been so strong? That one is simple. The dollar has been so weak. In today’s world the price of gold reflects a weakening paper currency, not an appreciating metal.”

In other words, according to Kotok, we are not in a bull market in gold. Rather, we are just seeing the dollar swooning as measured against a constant, i.e., gold. Which seems a somewhat peculiar defense of paper and blips. But, on this point, he’s right. Which leaves us with two major reasons to own gold at this juncture: there is no foreseeable savior on the horizon for our ever-weakening dollar, and the real fireworks in the gold markets haven’t even begun yet.

So should you complacently accept the inherent fragility in a monetary world of paper and blips, or perhaps protect yourself with a bit of that timeless old constant known as gold?

-Richard Smith