Gold and unrealistic expectations – Gold is not an investment


Gold has been characterized as Insurancea hedge against inflation/social unrest/instability, or, more simply, just a commodity. But he is treated most of the time, by most people, as a investment.

This is true even for 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 is compared to all sorts of other investments. And then the technicians start looking for correlations. Some say that an “investment” in gold is inversely correlated to stocks. But there have been times when stocks and gold have gone up or down simultaneously.

One of the “negative” characteristics commonly expressed 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 do not 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 additional income. It is a split liquidation and a payment of part of the value of your shares according to the specific price at the time. The price of your share is then adjusted downward by the exact amount of your dividend. If you need income, you can periodically sell some of your gold or stocks. In both cases, 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.” Essentially, higher interest rates cause gold prices to fall. And conversely, lower interest rates are correlated with higher gold prices.

The statement above, or a variant of it, appears (almost) daily in the financial press. This includes respected publications like the Wall Street Journal. Since the US elections last November, it has appeared in one context or another on several 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 otherwise) between gold and interest rates.

We know that if interest rates rise, bond prices fall. So another way of saying that gold will suffer from rising interest rates 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 – as interest rates rose rapidly and bond prices fell – gold went from $42 an ounce to $850 an ounce in 1980. That’s exactly the opposite of what one would expect according to the correlation theory quoted above and often written by those who are supposed to know.

During the 2000-2011 period, gold fell from $260 per ounce to a high of $1,900 per ounce, while interest rates fell from historic lows to even lower levels. .

Two separate decades of dramatically higher gold prices that contradict each other according to interest rate correlation theory.

And the disputes continue as we see what happened after gold peaked in each case. Interest rates continued to rise for several years after gold’s peak in 1980. And interest rates have continued their long-term decline, and even exceeded negative integers recently, six years after the gold peak in 2011.

People also talk about gold like they talk about stocks and other investments… “Are you bullish or bearish?” “Gold will explode higher if/when…” “Gold crashed 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 and most technically perfect logic will not lead to consistent results.

And, invariably, the expectations (however unrealistic) associated with gold, like everything else today, are endlessly short-term. “Don’t confuse me with the facts, man. Just tell me how soon I can double my money.”

People want to own things because they expect the price of those things to rise. It’s reasonable. But the higher stock prices we expect, or have seen in the past, represent valuations of increased quantities of goods and services and productive contributions to the quality of life in general. And that takes time.

Time is running out for most of us. And it seems to eclipse everything else to a greater and greater degree. We don’t take the time to understand the basic fundamentals. Just get straight to the point.

Time is equally important in understanding gold. In addition to understanding the basics of gold, we need to know how the weather affects gold. 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 currency for five thousand years of recorded history. Only one has stood the test of time – GOLD. And its role as currency has been brought about by its practical and convenient use over time.

Gold is the original currency. Paper currencies are substitutes for real money. The US dollar has lost 98% of its value (purchasing power) over the past century. This decline in value coincides in time with the existence of the US Federal Reserve Bank (founded in 1913) and is a direct result of Federal Reserve policy.

The price of gold in US dollars directly reflects the deterioration of the US dollar. Nothing more. Nothing less.

Gold is stable. It’s consistent. And it’s real money. Since the price of gold is in US dollars and 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 subjective and changing valuations of the US dollar from time to time and these changing valuations manifest themselves 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, are becoming less and less. What you can buy with an ounce of gold remains stable, if not better.

When gold is labeled as an investment, people buy it (“invest in it”) expecting it to “do something.” But they risk being disappointed.

In late 1990, there was much speculation regarding the potential effects on gold of the impending Gulf War. There were some upward price spurts and anxiety increased as the target date for “action” got closer. Almost simultaneously with the beginning of the bombardments by US forces, gold fell sharply, giving up its previously accumulated price gains and actually falling.

Most observers describe this turnaround as somewhat surprising. They attribute it to the rapid and decisive action of our forces and the results achieved. This is 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 involvement would not necessarily have undermined the relative strength of the US dollar.

The value of gold is not determined by world events, political unrest 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 happens to the American dollars.

Source by Kelsey Williams

Comments are closed.