Gold has been characterized as insurance, a hedge against inflation/social unrest/instability, or, more simply, just a commodity. But it is treated most of the time, by most people, as an investment.
is true even by those who are more negative in their 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 gets compared to all kinds of other investments. And then
the technicians start looking for correlations. Some say that an
‘investment’ in gold is correlated inversely to stocks. But there have
been periods of time when both stocks and gold went up or down
One of the commonly voiced ‘negative’
characteristics about gold is that it does not pay dividends. This is
often cited by financial advisors and investors as a reason not to own
gold. But then…
Growth stocks don’t pay dividends. When was the
last time your broker advised you to stay away from any stock because it
didn’t pay a dividend. A dividend is NOT extra income. It is a
fractional liquidation and payout of a portion of the value of your
stock based on the specific price at the time. The price of your stock
is then adjusted downwards by the exact amount of your dividend. If you
need income, you can sell some of your gold periodically, or your stock
shares. In either case, the procedure is called ‘systematic
The (il)logic continues… “Since gold doesn’t pay
interest or dividends, it struggles to compete with other investments
that do.” In essence, higher interest rates lead to lower gold prices.
And inversely, lower interest rates correlate to higher gold prices.
above statement, or some variation of it, shows up daily (almost) in
the financial press. This includes respected publications like the Wall
Street Journal. Since the US elections last November, it has appeared in
some context or other multiple times.
The statement – and any
variation of it that implies a correlation between gold and interest
rates – is false. There is no correlation (inversely or otherwise)
between gold and interest rates.
We know that if interest rates
are rising, then bond prices are declining. So another way of saying
that gold will suffer as interest rates rise is that as bond prices
decline, so will gold. In other words, gold and bond prices are
positively correlated; gold and interest rates are inversely correlated.
that all during the 1970’s – when interest rates were rising rapidly
and bond prices were declining – gold went from $42 per ounce to $850
per ounce in 1980. This is exactly the opposite of what we might expect
according to the correlation theory cited earlier and written about
often by those who are supposed to know.
During 2000-11 gold
increased from $260 per ounce to a high of $1900 per ounce while
interest rates declined from historically low levels to even lower
Two separate decades of considerably higher gold prices
which contradict each other when viewed according to interest rate
And the conflictions continue when we see what
happened after gold peaked in each case. Interest rates continued
upwards for several years after gold peaked in 1980. And interest rates
have continued their long-term decline, and have even breached negative
integers recently, six years after gold peaked in 2011.
also talk about gold the way they talk about stocks and other
investments… “Are you bullish or bearish?” “Gold will explode higher
if/when… ” “Gold collapsed today as… ” “If things are so bad, why
isn’t gold reacting?” “Gold is marking time, consolidating its recent
gains… ” “We are fully invested in gold.”
When gold is
characterized as an investment, the incorrect assumption leads to
unexpected results regardless of the logic. If the basic premise is
incorrect, even the best, most technically perfect logic will not lead
to results that are consistent.
And, invariably, the expectations
(unrealistic though they may be) associated with gold, as with
everything else today, are incessantly short-term. “Don’t confuse me
with the facts, man. Just tell me how soon I can double my money.”
want to own things because they expect/want the price of those things
to go up. That is reasonable. But the higher prices for stocks that we
expect, or have seen in the past, represent valuations of an increased
amount of goods and services and productive contributions to quality of
life in general. And that takes time.
Time is of the essence for
most of us. And it seems to overshadow everything else to an ever
greater degree. We don’t take the time to understand basic fundamentals.
Just cut to the chase.
Time is just as important in understanding
gold. In addition to understanding the basic fundamentals of gold, we
need 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 past one hundred years).
Lots of 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.
is original money. Paper currencies are substitutes for real money. The
US dollar has lost 98 percent of its value (purchasing power) over the
past century. That decline in value coincides time wise with the
existence of the US Federal Reserve Bank (est. 1913) and is the direct
result of Federal Reserve policy.
Gold’s price in US dollars is a direct reflection of the deterioration of the US dollar. Nothing more. Nothing less.
is stable. It 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 US dollar price of gold will continue to rise over time.
are ongoing subjective, changing valuations of the US dollar from
time-to-time and these changing valuations show up 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
When gold is characterized as an investment, people buy it
(‘invest’ in it) with expectations that it will “do something”. But
they are likely to be disappointed.
In late 1990, there was a good
deal of speculation regarding the potential effects on gold of the
impending Gulf War. There were some spurts upward in price and the
anxiety increased as the target date for ‘action’ grew near. Almost
simultaneously with the onset of bombing by US forces, gold backed off
sharply, giving up its formerly accumulated price gains and actually
Most observers describe this turnabout as somewhat
of a surprise. They attribute it to the quick and decisive action of our
forces and the results achieved. That is a convenient explanation but
not necessarily an accurate one.
What mattered most for gold was
the war’s impact on the value of the US dollar. Even a prolonged
involvement would not necessarily have undermined the relative strength
of the US dollar.