Worshipping The Golden Calf
Every show on Talk Radio advertises a company (and there are many) advocating the purchase of gold. They make compelling arguments that gold serves as a hedge against inflation. It does. Many of the advertisements leave a person under the impression that gold is the answer, should the world economy collapse. We question that premise.
TPP wants to start by saying that we are not financial consultants. This is not going to be investing advice. We are just looking at the trend and wondering about all of the gold hype. Why do we worship our golden calf?
Gold has no intrinsic value in and of itself. It has become valuable over time because it is a pretty yellow metal that is relatively rare. As a substance, it has few uses beyond simply being gold. It is too soft and too heavy to be used as we use other metals. Most of the gold in the world either decorates parts of our bodies, or sits in vaults where it is seldom seen. Still, it is the be all and end all of financial security, if the commercials are to be believed.
There's flawed logic in there and it is the aim of TPP, to bring it to light.
An ounce, a pound or a kilo of gold is worth what someone is willing to pay for it. A certain part of that price is based on supply. Gold is rare enough to hold the value that we deem it to have, but common enough to make it the basis for a monetary system. Most of what determines the price of gold is demand. More demand on what appears to be a finite resource will drive up price until the demand ebbs.
Let's take today's ounce of gold, which was trading at $1650.00 at my last glance at the computer. That's down considerably from it's peak of about $1850 last month, still it's a lot of money for a hunk of metal about the size of a half dollar. Gold has only been consistenly trading above $400.00 since December of 2003. Prior to that gold was generally in the $280 - $350 range and holding steady for the previous 10 years - Iink at
http://66.38.218.33/charts/historicalgold.html If you had bought that ounce in 1993, you had minimal movement, and no real return on investment until 2004. Even then it was minimal.
Using the same link you can trace data showing that as of 2005 there was a steady rise in gold price. In late 2007, at the start of the current recession according to most "experts", there is the start of the current gold boom. Still it was flat for most of 2008. In late 2008 during the housing and financial crash a hockey stick formed on gold pricing.
What does that mean? All that it means are that investors are moving their money. The safe havens of real estate and stocks were no longer safe. Demand for gold replaced demand for land or paper. The lump of gold didn't change, just what people are willing to pay for it.
Historically, the ownership of private gold was legalized in August of 1974 ( Glenn Beck fans will already know the backstory on this ). At that time gold topped $100 per ounce for the first time in history. There was a similar hockey stick when gold topped out a little over $700 in 1980 and 1981, in response to the severe recession of the late 70s. That spike slipped below $400 dollars in January 1982 and has stayed at about that level or lower until the current spike.
The translation on that is that if you bought an ounce of gold in September of 1981 you would not have been able to turn a profit on it until September of 2007 (except for a short blip in May 2006). That's taking $700.00, putting it in gold and taking a loss for 26 years. Not a great track record. Of course if you sold it today, you would have more than doubled your money. If you had prchased gold in 1974 at $100.00, you would have multiplied your money 16 times. the key to investment has always been buy low, sell high.
People invest in things that will make money. At the dawn of the investment age (we'll go with the Reagan era for our purposes here), money was made in stocks and real estate. The return on gold during the period from 1980 to 2005 was dismal. You would have done better putting your money in a standard bank savings account. Gold only gains value in bad economies, in response to inflation, and demand for safety. It doesn't perform well in a good economy.
Now let's go to the argument about monetary armageddon - hyper-inflation, even more massive unemployment, worthless money. We're not talking now or the 1970s. We're talking Weimar Republic Germany. It was a time when a whellbarrow full of German marks would not buy a loaf of bread (quite literally). Gold is supposed to be the ultimate edge.
While it's true that your gold would be worth much more, what are you going to do with it? Take it over to Starbucks and shave some off for your hyper-inflated $75.00 frappucino? No, you will need to sell it for that same paper money that is worth nothing. Then you can pack up the kids and take your wheelbarrow full of Federal Reserve Notes over to Mickey D's and colllect your Happy Meal. There is no hedge against hyper-inflation if your only alternative is to trade the pretty yellow metal with no real value for paper with no real value.
In every economy that has collapsed in on itself, barter is the economy that emerges. Trading items of real value (food, meat, clothing , shelter, and we imagine in this scenario weapons). The gold and the big screen TV won't be worth squat. People with practical skill sets will do fine. Farmers and ranchers, mechanics, carpenters, plumbers, tailors, engineers, doctors - these will be in demand and can trade skills for necessities. People with not so practical skill sets (such as gold brokers) might be in a little trouble.
Common Sense Dictates
There's a lot of hype about gold. TPP is not saying that it's a bad deal. Many of the gold brokers are saying that gold will break $3000. That seems realistic when following today's hockey stick numbers. It's what has historically happened with gold and silver in the 70s. It is also the basis for the dot-com run up, the housing run up, the stock run up, and every other run up in history. It is a feeding frenzy. We sense a bubble. If gold reacts as it has, the pop is coming. We don't know when, we're just applying common sense to our observations.
So, is gold right for you? We don't know. We suggest you get yourself educated before you plunk money down. Common Sense advises us to follow the common sense rules - buy low and sell high. If it sounds too good to be true, it probably is. No one offers to sell you something unsolicited without a good idea that they will make money. Knowing how to do something is better than having to buy it. Don't succumb to herd mentality. Think for yourself. A side of beef tastes better than a golden calf.
It's the Common Sense that we learned from our parents, at least many of us did. It's time to use it.
RLB
Categories: Historical perspective, The Economy
Tags: economy historical perspective
Anyone investing in gold right now is playing Russian roulette. It will keep trending up while the economy sucks, but as soon as it turns around gold will be back at $400. That's what it's worth in a good economy. Take your short term gains guys. Sell now.
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Not a problem for me. I'm too busy trying to hold onto the house and buy food. Not a lot of money to buy gold with. If your gold investment is your big concern, you really don't have problems.
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Awesome post. Do you mind if I ask what your source is for this information?
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I stopped adding gold when it broke $1000, and my plan is to sell at $2000, and reinvest it in some undervalued stocks. Unemployment is still high, but the economyis coming around. We're seeing new business, and more orders. I think you're right about gold prices coming down as soon aspeople start to think that things are getting better.
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Diversification is the key. Don't put all of your eggs in one basket. It's ok to have gold, just don't have everthing in gold. Gold will balance out a weak stock market or real estate tanking. Now is a great time toinvest in real estate - it can only go up. There are other commoddities, too. I lie petroleum (oil sin't goingto be coming down anytime soon) and lithium (for all of those advanced batteries Obama wants to fund). Buy what's cheap and sell it when it's expensive. That's the key.
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There's a lot of wisdom in what you say. We live in a very rural area, and there's not a lot of services (police, fire, etc) that can get out here with any speed. It's pretty much 'practice' Armageddon - lots of self sufficiency. We in an earthquake area as well. I've got a little gold, but what I do have is a month's worth of food and water stored, a generator and fuel, and the ability to defend my property effectively. If it all goes to hell we'll be okay. I feel sorry for those people who will be trying to use their gold if disaster hits. I feel sorry for anyone foolish enough to be buying it now. It's way overpriced.
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The price of gold is up BECAUSE of all of these gold shysters driving the speculation. Everyone buying gold right now is paying their good money to people who have already got gold, and they got it on the cheap. This is the same as the Hunt brothers driving up silver prices in the 70's. Anybody buying gold now might just as well spend their money on lottery tickets.
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Everyone wants to get in on a good thing, even when it's no longer a good deal. Education is the key. If you're just buying gold because it's going up in price, you probbly have an adjustable rate mortgage and are underwater on your house. People are lemmings.
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Making money involves risk. You make more money with more risk. There's a lot of money to be made in gold right now. Let's say gold does go to 3 thousand and ounce. You buy today, you more than double your money. If you're sitting on gold now and sell today, you miss all of that extra money. Investing is not for the timid.
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Ditto Craig. You can sit on the sidelines all you want. I'm going to make money. Enjoy the 1% you're getting at the bank.
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You just can't educate some people. Craig & Mark - if you crash and burn, I don't want to hear about you asking for a bailout. I agree with your assessment. Gold has jumped the shark. time to get out.
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Hey, everyone has a different tolerance for risk, and timing is everything. There is probably still room to make money in gold. The conditions in the economy have not improved, and inflation is on the uptick according to the headlines today. Once things start to turn around gold is going to drop rapidly in value. You just have to play smart.
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This is weird. I've got toagree with Valerie on this one. Talk Radio is a huge medium, and the fact that nearly every show hawks gold except Dave Ramsey. His sponsor urges you to sell gold - so it's stillpart of the frenzy. If there wasn't all this media buy in, there would be far less attention paid to gold and demand wouldn't be so great. As you said, demand drives price. I wouldn't call it a conspiracy, but it's a contributor.
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Inever really thought about gold not being worth anything. It has always been money everywhere. But you're right, if civilization crashed, or if the economy tanks, gold id a pretty useless possession. I guess it's the same with paper money. It's just an IOU from the Fed. It is the work that one does to get it that has the value. Our whole system is based on an illusion of what is actually worth something. Now that's scary.
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I'll cash in that ounce of gold for a couple of Glocks. That's metal with value.
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It all comes down to greed. It looks like a way to make a quick buck without working for it. Barnum had it right - There's a sucker born every minute. Anyone who understands finances would stay away from gold except as maybe a 10% hedge in case the rest of the portfolio goes bad.
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The time for buying gold was when the market was stable at $400 an ounce. anyone buying now is playing a really playing a game of chiken with an oncoming train. Maybe you get a good return, but no longer a great return on investment. I think the assessment that we are in a gold bubble is on the money. Time to sell.
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Gold has taken on a mob mentality. Investing in anything that has a bull rush going on is just following the lemmings off of the cliff. I can't figure out excatly when it happened, but it looks like America has lost it's common sense principles of saving and investing. Now we're all tossing around chips in some Wild West casino, an very few people understand the game. All of the gold buyers who know what they are doing are buying on the margins, and selling to the dupes who want to own "physical" gold. Hyperinflation or not, the gold house of cards will come crashing down in the next year or so. If you want to let your money ride that long, well God protects fools and drunks. Good luck to you.
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Gold has been flat now for over a month. It has been within $50 plus or minus of $1400 since March 1. There's no money to be made here anymore.
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Now THIS is on the money. Agree 100%.
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Good article. There is an electonics use for gold that is extremely valuable. Other than that, if every business founder had tied up their wealth in previous metals or gems, our would would have very little else. Tangibles that people need for their lives are truly more valuable as gold prospectors have all found when it came time to purchase necessities like food, clothing, and gear.
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We've seen this before and those that have invested hugely in gold, I believe, are fixing to take a beating. Anyone remember the Hunt brothers? That was silver of course but the premise is the same. The only thing that will be of value if things get bad is your bible, your weapons, ammo, food, water and fuel
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I've always wondered if the day comes when the price of everything becomes so high what good would it do to horde gold if all you could purchase with it is a pair of socks?
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You only need to read the books of 1st & 2nd Kings in the old Testament to understand that you cannot eat your gold. Those that have/control the every day commodities will wield the real power when society finishes eating itself...
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I bought it at $900 and would still own it even if I had bought it at $1800. It is a hedge against what the future holds...not a current investment to be sold for a profit now. Commodities have always been held for their ability to ease a dramatic loss in other markets...in the present case a hedge against the coming inflation.
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if it is held, it can't be used. it sits in a vault, or a box owned by someone that must be paid to look out after it, or in a fund where the owner never sees it and is charged management fees. And the owner cannot, unless he or she buys more, influence it's value, thus, he/she has no control over increasing the valaue of ones investment. His investment will be influenced by others, not him. I just don't get the desirablity of it, other than it does not physically degrade. Now, if the buyer is a goldsmith then, yes, that person adds value by shaping it into something useful or, at least, someone else will buy.
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