Gold is characterized as insurance, a hedge against inflation / social unrest / instability, or, more simply, simply marketable. But most people are seen most of the time as investment.
This is true even in those who are more negative about gold. “Stocks are the best investment.” In most cases, the logic used and the results of the work 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 other types of investments. And then technicians start looking for correlations. Some say that “investment” in gold correlates back with stocks. But there were periods of time when both reserves and gold rose or fell at the same time.
One of the common negative characteristics of 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 stocks because it didn’t bring dividends. Dividend is NOT additional income. This is a small liquidation and payment of part of the value of your shares based on the specific at that time price. Your share price is then adjusted downwards by the exact amount of your dividend. If you need income, you can periodically sell part of your gold or your shares. In any case, the procedure is called “systematic withdrawal.”
The (non) logic continues … “Because gold does not pay interest and dividends, it struggles with other investments.” In fact, higher interest rates lead to lower gold prices. Conversely, lower interest rates correlate with higher gold prices.
The above statement or its variant is reported daily (almost) in the financial press. This includes reputable publications such as the Wall Street Journal. Since the U.S. election last November, they have emerged in one context or another several times.
The statement – and any variations of it that suggest a correlation between gold and interest rates – is false. There is no correlation (back or otherwise) between gold and interest rates.
We know that as interest rates rise, bond prices fall. So, another way to say 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 related.
Except that during the 1970s – when interest rates rose sharply and bond prices fell – gold rose from $ 42 an ounce to $ 850 an ounce in the 1980s. This is just the opposite of what we might expect according to the correlation theory given earlier and about which those who need to know often write.
During 2000-11, gold increased from $ 260 an ounce to a high of $ 1,900 an ounce, while interest rates fell from historically low levels to even lower.
Two separate decades are much higher gold prices that contradict each other when viewed according to the theory of interest rate correlation.
And conflicts continue when we see what happened after gold peaked in each case. Interest rates continued to rise for several years after gold peaked in the 1980s. And interest rates have continued their long-term decline and have even broken negative integers recently, six years after gold peaked in 2011.
People 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 like …” “If things are so bad, why doesn’t gold react?” “Gold marks the time, securing its recent profits …” “We have fully invested in gold.”
When gold is characterized as an investment, a misconception 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 (albeit unrealistic) associated with gold, as with everything else today, are incessantly short-lived. “Don’t confuse me with the facts, man. Tell me how fast I can double my money.”
People want to own things because they expect / want the value of those things to go up. That’s reasonable. But higher stock prices, which we expect or have seen in the past, appreciate the increase in the number of goods and services and the productive contribution to quality of life in general. And it takes time.
For most of us, time is of the essence. And it seems to increasingly obscure everything else. We don’t waste time to understand the basics. Just cut.
Time is no less important for 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 been going on with the US dollar for a long time (the last hundred years).
Many things have been used as money for five thousand years of recorded history. Only one withstood the test of time – GOLD. And the role of money has brought practical and convenient use over time.
Gold is original money. Paper currencies replace real money. Over the past century, the US dollar has lost 98 percent of its value (purchasing power). This decrease in value coincides in time with the existence of the US Federal Reserve (c. 1913) and is a direct result of Federal Reserve policy.
The value of gold in US dollars is a direct reflection of the deterioration of the US dollar. Nothing more. Nothing less.
Gold is stable. It’s constant. And that’s real money. As the price of gold in US dollars and as 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 constantly subjective, volatile valuations of the U.S. dollar that change periodically, and these volatile valuations are reflected in the ever-changing value of gold in U.S. dollars. But in the end, what matters is what you can buy for your dollars, which become smaller over time. What you can buy for 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 may be disappointed.
In the late 1990s, there was much speculation about the potential impact on gold of a future Gulf War. There have been surges in rising prices, and anxiety has been growing as the target date of “action” approaches. Almost simultaneously with the beginning of the bombing by American forces, gold retreated sharply, abandoning previously accumulated price increases and actually declining.
Most commentators describe this turn as a kind of surprise. They explain this by the rapid and decisive action of our forces and the results achieved. This is a convenient explanation, but not necessarily accurate.
For gold the most important was the impact of the war on the value of the US dollar. Even prolonged participation would not necessarily undermine the relative strength of the US dollar.
The price of gold is not determined by world events, political upheaval or industrial demand. The only thing you need to know to understand and appreciate gold as it is is to know and understand what is happening to the US dollar.