Gold has been characterized as surehas coverage against inflation/social unrest/instability, or, more simply, just a goods. But it is treated most of the time, by most people, as a investment.
This is true even for those who have a more negative attitude towards gold. “Stocks are a better investment.” In most cases, the logic used and the performance results justify the statement. But the premise is wrong. Gold is not an investment.
When gold is analyzed as an investment, it is compared to all kinds of other investments. And then the technicians start looking for correlations. Some say that an ‘investment’ in gold is inversely correlated with stocks. But there have been periods of time when both stocks and gold went up or down simultaneously.
One of the commonly expressed “negative” characteristics about gold is that it does not pay dividends. Financial advisors and investors often cite this as a reason not to own gold. But then…
Growth stocks do not pay dividends. When was the last time your broker advised you to stay away from any stock because it didn’t pay dividends? A dividend is NOT extra income. It is a fractional liquidation and the payment of a part of the value of your shares based on the specific price at that time. Your share price is then adjusted downward by the exact amount of your dividend. If you need income, you can periodically sell some of your gold or your shares. In any case, the procedure is called ‘systematic withdrawals’.
The (il)logic continues… “Since gold does not pay interest or dividends, it struggles to compete with other investments that do.” In essence, higher interest rates lead to lower gold prices. And conversely, lower interest rates correlate with higher gold prices.
The above statement, or some variation of it, appears (almost) daily in the financial press. This includes respected publications like the Wall Street Journal. Since the US election last November, it has appeared in one context or another on multiple occasions.
The statement, and any variation of it that implies a correlation between gold and interest rates, is false. There is no correlation (inverse or not) between gold and interest rates.
We know that if interest rates are going up, then bond prices are going down. So another way of saying that gold will suffer as interest rates rise is that as bond prices fall, so will gold. In other words, gold and bond prices are positively correlated; gold and interest rates are inversely correlated.
Except that throughout the 1970s, when interest rates were rising rapidly and bond prices falling, gold went from $42 an ounce to $850 an ounce in 1980. This is the exact opposite of what we might expect according to with the correlation theory quoted above and often written by those who are supposed to know.
During 2000-11, gold rose from $260 per ounce to a high of $1,900 per ounce, while interest rates fell from historically low levels to even lower levels.
Two separate decades of sharply higher gold prices contradict each other when viewed according to interest rate correlation theory.
And the conflicts continue when we look at what happened after gold peaked in each case. Interest rates continued to rise for several years after gold peaked in 1980. And interest rates have continued their long-term decline, even breaking above negative integers recently, six years after the Gold will peak in 2011.
People also talk about gold the same way they talk about stocks and other investments… “Are you bullish or bearish?” “Gold will explode higher if/when…” “Gold crashed today like…” “If things are so bad, why doesn’t gold react?” “Gold is stalling, consolidating its recent gains…” “We are fully invested in gold.”
When gold is characterized as an investment, the wrong assumption leads to unexpected results, regardless of logic. If the basic premise is wrong, even the best technically perfect logic will not lead to consistent results.
And, invariably, the expectations (as unrealistic as they may be) associated with gold, as with everything else today, are relentlessly short-term. “Don’t confuse me with the facts, man. Just tell me when I can double my money.”
People want to own things because they expect/want the price of those things to go up. That is reasonable. But the higher stock prices we expect, or have seen in the past, represent valuations of a greater number of goods and services and productive contributions to the overall quality of life. And that takes time.
Time is of the essence for most of us. And it seems to overshadow everything else to an ever-increasing degree. We don’t take the time to understand the fundamental basics. Just get to the point.
Timing is so important in understanding gold. In addition to understanding the basics of gold, we need to know how time affects gold. More specifically, and to be technically correct, we need to understand what has happened to the US dollar over time (the last hundred years).
Many things have been used as money during five thousand years of recorded history. Only one has stood the test of time: GOLD. And its role as money was brought about by its practical and convenient use over time.
Gold is original money. Paper currencies are substitutes for real money. The US dollar has lost 98 percent of its value (purchasing power) over the last century. That decline in value coincides in time with the existence of the US Federal Reserve Bank (established in 1913) and is a direct result of Federal Reserve policy.
The price of gold in US dollars is a direct reflection of the deterioration of the US dollar. Nothing else. Nothing less.
Gold is stable. is constant AND it is real money. Since gold is priced in US dollars and since the US dollar is in a state of perpetual decline, the price of gold in US dollars will continue to rise over time.
There are ongoing subjective and changing valuations of the US dollar from time to time and these changing valuations are shown in the constantly fluctuating value of gold in US dollars. But in the end, what really matters is what you can buy with your dollars, which, over time, is less and less. What you can buy with an ounce of gold remains stable, or better.
When gold is characterized as an investment, people buy it (‘invest’ in it) with the expectation that it will ‘do something’. But they are likely to be disappointed.
In the late 1990s, there was much speculation about the potential effects on gold of the impending Gulf War. There were some price spikes and anxiety increased as the ‘action’ deadline approached. Almost simultaneously with the start of the bombing by US forces, gold pulled back sharply, giving up its previously accumulated price gains and actually moving lower.
Most observers describe this turn as something of a surprise. They attribute this to the swift and decisive action of our forces and the results achieved. That’s a convenient explanation but not necessarily accurate.
What mattered most for gold was the impact of the war on the value of the US dollar. Even prolonged engagement would not necessarily have undermined the relative strength of the US dollar.
The value of gold is not determined by world events, political turmoil, or industrial demand. The only thing you need to know to understand and appreciate gold for what it is is to know and understand what is happening to the US dollar.