Why Should I Own Gold? 30 comments
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Let me start this by saying that I am a big fan of gold, as well as most things that are shiny. Gold is a wonderful trading vehicle, maybe better then the VIX even as a measure of panic. I do not, however, understand why someone would own gold in an investment account over the long term. I understand that people view it as an inflation hedge, but I can’t wrap my head around the reason why.
One argument I hear often is about fiat currency. Why would gold have any value that was greater than the perceived fiat value that of the USD? I am not debating that people have made a good deal of money in gold over the last few years, nor am I debating that there is clearly a strong demand for the streetTracks Gold ETF (GLD), but I just don’t get the fundamental reason. Gold bugs always seem to be so focused on gold being the only thing with “real” value, but why? The only thing I can think of is that people fear that the USD could lose its place as the world's reserve currency… but I mean, if you want to be short the dollar, why not just be short the dollar?
Where is the fundamental supply and demand that makes gold hold value other then the constant inflow of money into GLD? I understand why pirates wanted gold - it was the main medium of exchange - but in situation where one can buy assets that have real applicable values or that pay you to own them, what is the point really? I guess there is a case to be made that the financial system could come crashing down and send us back into an agrarian society, but honestly, in that case, would you really expect the banks to FedEx you out some bullion?
So maybe you should own physical gold? But if the system did come crashing down, wouldn’t you do better owning a few cows, a green house, and a shotgun?
Intuitively, I do feel that gold is valuable, if only because all of my life it has seemed to be. I also understand that gold does do well when the dollar goes down, and does even better when fear of the dollar goes up. I understand why oil, for instance, is (or at least was) going up; be it because of speculators, supply/demand, or whatever… I get that, even if peak oil isn’t right, there is no doubt that at some point there will be less oil available than there is now. Oil, however, is an input commodity; gold, while pretty and shiny, doesn’t have a significant practical demand. Huge amounts of gold are produced, and I just don’t get where it all goes, except into storage via things like GLD and around Michael Phelps’ neck.
I own Freeport-McMoRan (FCX), which is linked to gold as a major position in my portfolio, but FCX produces and sells gold, they don’t hold it. I hear often that gold is a hedge against inflation, but don’t TIPS, which offer a far greater IRR due to the payments you receive, make more sense over the long term?
I guess the major point of confusion I have is that the people who advocate gold tend to be the value types, and they usually have a reason for owning something. I have read Adam Smith; I know about the diamond-water paradox and I also understand marginal utility. Yet gold has dramatically outperformed in the last few years.
I am a strong advocate of the idea that things that go up in value are great things to both trade and own. I want to own gold, but am having a hard time justifying the concept. I guess what I am really asking here is, can someone please explain to me why I should own gold for the long term?
Disclosure: Author holds FCX
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This article has 30 comments:
You need to understand that the piece of paper that is a $100 bill cost only a few cents to make, no more than the $1 bill. That is what fiat means. Backed by nothing other than the faith of the US government and unconstitutional tender laws that say you can redeem a tattered dollar bill with another one. There is nothing in fiat currency to keep us honest, to keep the people close to the vest from taking advantage of inflation and working it to the common people's disadvantage. We cannot resist the temptation. It is part of human nature. History is littered with stories like this. The Ancient Roman empire? Archaeologists in the last few years finally confirmed that the ancient government did indeed debase the currency by increasing the amount of base metals in what were originally gold and silver coins, and finally going to all-base-metal coins, even clipping the gold coins. The Chinese experiment in paper money? They played with it for several centuries, having to reform it several times because of inflation. The US Continental Dollar? "Not worth a continental" came out of the Revolutionary period. The Union greenbacks? Used to fund the Civil War because gold couldn't be made fast enough to fund the war. I just checked the Bureau of Labor Statistics' web site that has an inflation calculator that shows that the dollar in 1913 had the same buying power as $22.22 today does. www.bls.gov/data/infla... - that is over 95%!
You have to understand that inflation is a form of stealth theft. The people that get first dibs on money to start and run businesses, or even do nothing by virtue of connections get to buy stuff at lower prices than the rest of us do. Our wages now do not keep up with inflation.
Being on a gold/silver standard taught us how to live within our means. If we wanted our store of value to increase, we had to get out there and work for it. There was little in the way of investing the money in stocks or artificial financial instruments and getting rich off them. These financial instruments are a lazy person's perfect dream of not having to work. We can't have this. Someone has to pick up the garbage, fix electrical faults, fix blown engines, fix collapsed bridges, do complicated bone surgeries, keep records of customers in order to formulate SOME kind of financial budgeting for the following fiscal year, etc. You can't have everyone rich and not doing anything or at the least, playing money master.
All these reasons and more is exactly why we had a silver standard to start with (read the coinage Act of 1792 - according to this thing, a lot of people today are eligible for the death penalty). The founding fathers had experience with exactly what we are dealing with today.
Gold will do very little for You in the worst situation. But it will give You a great start after a monetary reform. Just take a look at the bio of Ignaz Bubis, he made a fortune with Gold after WWII.
Greets
-R
The United States is BROKE!!!! There is no more money unless we create (print) it. We owe more than the next 3 generations can pay back!!! Unless we print more... This devalues the money in your wallet and in your bank account. Your paycheck buys less and less every month. This cannot continue indefinately. Imagine if this was going on in your home.... Each month you spent on credit 25% more than you could actually afford...pretty quick the interest on that credit is more than your actual purchases. Pretty fast you don't have the ability to pay the minimum payments required. Your personal choices would be to default and declare bankruptcy (look at how many are doing just that!) or maybe turn to a life of crime.
Our government prints money to pay for the excess spending shooting itself and us in the foot. Foreign countries buy our debt and will eventually call us on it either tangibly or by holding us financially hostage in a political situation..
Oh I could go on.... but there are so many better ways to do research on why you need to own gold than to ask the bunch of us...and you know them.
Ever since the 1960s, Washington has gulled its citizens and creditors by debasing official statistics, the vital instruments with which the muscle and vitality of the American economy are measured.” – Kevin Philips, April 27, 2008 Harper’s magazine entitled Hard Numbers: The economy is worse than you know.
It is no secret how fast overall debt has grown and how government agencies fudge the numbers to make the economic picture appear far more pleasing than it really is. This week we take a closer look at how they do it.
Why has the spotlight of media attention suddenly illuminated this problem now? We’ll explore this question in a moment.
Since the U.S. was taken off the gold standard by Richard Nixon in the early 1970s, the government has become far more creative at using inflation indicators to lull citizens although real inflation has skyrocketed, especially come election time. The double whammy is that they are also artificially boosting economic growth figures. As Martenson points out, various administrations, both Republican and Democrat have used some very clever methods to achieve this end.
Real growth occurs when inflation is low and economic growth is high. Martenson tracks how each president from JFK to Bill Clinton has added his own special sauce in dealing with undesirable stats to make things seems rosier than they really were. While these fibs have grown in both proportion and scope, their forecasting value has steadily declined.
How has this goal been achieved?
In an effort to keep inflation down and accentuate growth, statisticians shamelessly distort and manipulate the data. For example, the Consumer Price Index measures inflation in part by comparing a basket of goods over the years. But what is not publicly understood is that each year, that basket changes. In 1996, Clinton instituted changes to how the statistics are calculated that provided government economists with three new powerful methods to fudge the numbers; substitution, weighting and hedonics (derived from the Greek word for pleasure). They in effect, give government agencies three new tools to change the way they measure and present inflation and economic data at their pleasure.
Here is just one example of how one of these tools, namely substitution, works. If the price of salmon goes up too much, the Bureau of Labor Statistics substitutes it for a cheaper food item like say hot dogs. The result is that from 2007 to 2008, CPI showed a 4.1% rise in the price of food. But according to the Farm Bureau, that tracks the same basket (without using substitution, weighting or hedonics), food prices actually rose 11.3%!
Figure 2 – Difference between how CPI is calculated today by the BLS and how it was calculated in the 1960s without all the smoke and mirrors. As a result real inflation is now running at 13% not the 5%, the BLS would have us believe. Chart ChrisMartenson.com Fuzzy Numbers (see link below).
Without a doubt, hedonics is the most insidious tool in the hands of government statisticians. It allows them to creatively reduce CPI (inflation) on one hand while making economic growth appear bigger than it really is on the other. Without giving away the whole story, these minions can change the price of a product, service or good by imputing a higher value (in the case of the economy) to make growth appear greater while imputing a lower value (in the case of an inflation measure like CPI) to make inflation appear lower than it really is.
Hedonics, substitution and weightings changes currently represents 46% of reported CPI and 35% of reported GDP growth according to Martenson. In other words, about one-half of the CPI reported is real while less than two-thirds of reported GDP growth is real. The result is that inflation is growing at least twice as fast as CPI shows while economic growth appears to be nearly 50% greater than it really is.
What if CPI were calculated the same way it was in the 1960s? Using the techniques employed more than 40 years ago, John Williams of ShadowStats.com estimates that CPI in 2008 is running at 13% not the 5% reported by the BLS (see Figure 2). It’s no surprise that some economists are quick to discount Williams's conclusions but one only has to examine the rapid recent rise in global inflation to see the problem. Even with all the fudging techniques now used by government, the problem eventually becomes impossible to hide once it becomes acute.
It doesn’t take a genius to realize what will eventually happen if inflation is continually under-reported while the economic output is distorted higher. Those who rely on this data to make decisions are relying on increasingly incorrect data and therefore make erroneous decisions – the most obvious of which is to assume the economy is growing when its not. Consumers spend more money (and go further into debt) thinking the economy is better than it is and get themselves in financial trouble. More troubling is that the majority of workers remain oblivious to job losses, an error that only becomes apparent to most when they unexpectedly lose their jobs.
What motivates governments to engage in this deceptive practice? Undoubtedly, the strongest effect of this practice is seen in the election cycle. A number of studies show that markets do so much better leading up to elections versus after each election is over. What causes this skew? It is the overriding desire of each successive administration to get re-elected.
It is a well-understood reality that voters deal harshly come election time with incumbent governments if the economy is in trouble. Governments know this and over the years they are getting better at perfecting ways of putting voters in a good mood as they get ready to head to the polls. And inflation is the most powerful tool in their arsenal. How much better have stocks done leading up to elections versus afterwards? Read our Special Report that tracks pre-election versus post election gains in the Dow.
Getting back to our first question above, why are these documentaries and reports now gaining public attention? When bubbles are in the process of forming, everyone is too busy figuring out how to profit. It is only when they begin popping and the economy deteriorates that we reflect on our fates.
What happens when the foreigners financing our debt habit, who have also been lulled by government statistics, realize they’ve been duped?
Interest rates will rise as the cost of money skyrockets to reflect true risk. Unfortunately, this usually occurs at the worst possible time when the economy is most vulnerable and the majority is unaware of their impending fate, if history is any guide.
Or redeem it in Euros perhaps... but their banks are failing as well......
The way I like to think about this reason for buying gold is if you buy car insurance and then at the end of the year you have not had an accident, you don’t say to yourself “well that was a waste of money, I paid the premium and never got to claim on the insurance policy”. Instead you say “great, I didn’t have an accident, how lucky” and you write-off the premium. This is the same attitude these clients have towards gold – if the price goes down, they don’t moan about the money lost, they consider themselves lucky that there was no economic breakdown. They don’t want to make a lot of money out of gold, because in their view this means that they have lost all their other investments.
I did have a hard time being able to put myself in their shoes and understand where they were coming from until I dealt with this lovely lady who used to ring up every now and then to make sure we were still there and everything was OK. Where did she live? Israel. Might not sound rational, maybe there were better offshore places/ways to store her wealth, but having that gold save haven way over in Australia sure did make her sleep well at night.
I have gold Rolex Daytona and it is one of my investments in gold,also I buy 5-10g gold bars and give them away instead of business card,this way I am more noticed and remembered.Also jewelry for women looks nice in general same as platinum,white gold etc.,it looks expensive.
But as concerning value owning gold as investment,there is no sense,Central Banks have reserves from the past they don't buy new gold for reserves and stories of China Central Bank or any other country buying it is bluff,lies.
I also like to trade GC futures and make good money on it mostly shorting on bounces.
What sense all gold/silver/palladium stocks have at all,no sense,it is all on paper same as trading futures.
That's why I would never own gold as investment.
You asked, "What motivates governments to engage in this deceptive practice?"
The answer is pure and simple. The fractional reserve banking industry along with the Federal Reserve have greedily taken over the American financial system and they have negligently mismanaged it. Since the politicians are in their pockets and since they control inflation and growth data, they will massage the numbers to try to prop up the inevitable failing banking system. The writing is on the wall. When you see the greenback printed on only one side, as was the Weimar Republic currency, it will mean that the government can't print the stuff fast enough.
This obvious mismanagement and avarice alone are good enough reasons to own (possess) gold and silver. Take delivery, rathole it away and forget it. There is no guarantee that you will get your gold when you need it from ETFs and shared pools. Don't trust anyone with your gold and silver.
Those who think that gold is an investment do not understand that it is the greatest hedge against political corruption and economic collapse. If one "invests" in gold, than one can be sorely disappointed. Owning gold can give one a piece of mind like nothing else.
I am long GLD, which is a completely different strategy from holding physical gold. I hold GLD because the price of stored gold will of necessity catch up with the burgeoning shortage of physical gold. My profits are in dollars, I know, and that is an issue, but it feels like a better hedge than, say, bank stocks.
I hold gold and gold ETF because they are among the relative handful of things which will hold value if it hits the fan. And it might.
Oops, sorry; I meant "peace" of mind.
A "gold standard" is just completely foreign to most American citizens under the age of 75-80 b/c they've never really lived under one. And secondly the brainwashing done by the Mainstream Media...the Dept of Truth as Orwell liked to call it...supported and controlled by the powers that be who own it -- the bankers (just as Nathaniel Mayer [Bauer] Rothschild stated some years back: "I care not who sits on the throne of England...he who controls the money supply controls the throne, and i control the money supply") has taken its toll.
Anyone thinking clearly would have to agree that an ounce of gold has intrinsic value, and certainly more intrinsic value than a piece of paper with $1000 printed on it known as a Fedl Reserve Note...what exactly do you think they hold in reserve for the holders of that note???...not one d*mn thing!!...there's absolute nothing of value behind it...just a rather large and power computer. But since the price of gold and silver have been suppressed for so long, and since price action makes market commentary, most have swallowed hook, line, and sinker that they have no particular value as an "investment." But those posting here above have already shown the folly of investing in the "dollar." It has lost over 95% of its value since 1913 in terms of purchasing power...and it ain't even begun to reach its bottom. Even if you're getting 10% interest or gains on your dollar-based investments, by calculations using the CPI formula used before Clinton, inflation is now over 13%, so you're STILL losing value. And that doesn't even start to take into consideration now greater than $Quadrillion in derivative debt (fast becoming real debt) that is attached to the dollar like an other-worldy anchor, draggin it into the abyss. Think of buying gold and silver as a way to trade in worthless and growing ever more worthless pieces of paper for something of real intrinsic value...worldwide.
IMO and I'm sure in the opinion of many posting here, gold and silver will without a doubt also turn out to be a good "investment"...but in the meantime, it's a store of value / wealth at the worst. jt
Bingo, right on the money.
Gold is one of the best ways to transfer wealth from generation to generation, as there is no title to track, no bank accounts to penetrate, no tax information on it.
www.rapidtrends.com/bl.../
The nature of our money defines the nature of our society.
If you can simply create money from nothing then you can essentially afford to do anything you wish. You can build the tallest building in the world and look out over all. You can build a fleet of space ships and fly to the moon. You can build the largest most powerful army in the world and none dare stand in your path.
What would you do to the world if you could create money from nothing? What would a well meaning fool do? What would a psychopath or sociopath do?
On the other hand, making gold isn't quite as easy as stamping a piece of paper.
Everything else of value that could be found was looted from them including some famous artwork now sitting illegally in museums, sold and resold many times over by unscrupulous dealers.
Trust me, when you are raised on war stories, and follow international headlines today you see some striking similarities. I will never be one of the foolish who think that "it won't happen here".
I keep my home happily optimistic as a good mother does, but I am completely prepared and realistic when it comes to protecting my family. So, we don't live our lives as if doom is hovering over us...because kids don't need that stress, but you can bet I have got all bets covered just in case...
Add to the illiquidity of real estate the high cost of asset transfer and the inadequate pricing mechanism and we see where a little physical gold and silver can be comforting assets.
Precious metals are not alway countercyclical to stocks. I believe from 1980 to 1983 or thereabouts, gold and stocks both rose with gold perhaps rising more percentagewise. When it became clear that hyper inflation was not about to occur, gold fell back and stocks started setting the stage for the massive bull market of the 90's while gold and silver made a pretty good sized trading range.
What seems to be a little different this time around is the low interest rate on long government bonds. If a major deflation occurs then that 4% +/- yield on govies looks pretty doggone good. If some of the blogs I've read are correct, bond returns have been very competitive with stocks over the past 10 years. So, I agree with the comment that owning several classes of assets is a pretty good idea and selling some of the winners and buying some of the losers over longer periods of time will probably work out reasonably well and reduce both market and inflation (deflation) risks.
My late Estonian mother told me a story when I was quite young and I never forgot it. Her father bought gold a little at a time over many years. When the Russians invaded Estonia, it was a disaster. The only reason her family was able to survive was that her family had saved gold. Paper currencies were worthless as were bank accounts and other paper assets.
Although our situation may be different today, hard times are hard times in any language. When my mother recently died, she had possession of gold.
To re-phrase Jacob's question, "Why buy more gold than you can wear? It has few practical applications, it doesn't produce income and it's long term appreciation is irratic.".
Since we both accept beauty as one of its significant traits, I believe the answer to your question is durability, portability and scarcity.
Throughout time, eating regularly has been the number 1 problem. It still is for much of the world. Man's time and effort has been invested in devising means to spread the times of plenty into the times of want to improve chances of survival. Wealth is best described in terms of how long can you eat on what you've got? People sought ways to store up food, which was their wealth.
Without drawing this story out too far, they learned how to grow and store grains so that they lasted more than a year. This went a long way toward answering the problem. However, they realized that although grains would keep for a while, they would eventually rot and livestock would eventually die. It became obvious that one could not trust one's life savings to any thing animal or vegetable. That leaves...
Please note that I'm taking about saving or storing wealth for an unknown time in the future as opposed to investing. They didn't expect it to increase in value. They would be delighted if it simply held its value.
Dirt became the first acknowledged store of wealth because food came from dirt. The guy with the most dirt survived political, economic and environmental catastrophies better than anyone else. Also, he could pass his dirt (wealth) on to someone when he died.
As the society of man progressed, the local marketplace persisted for perishable items but what about the potter, the cooper, the fletcher, the armor and others who made goods one bought only once in a while? These craftsmen stayed put and sold to middle men who traveled from place to place selling their wares and eventually gave rise to a whole new class of society called the merchants.
It was this traveling which created a need for portable wealth. Dirt doesn't travel well. You need concentrated dirt. You can think of gold as concentrated dirt, if you like. Why gold instead of other minerals? It is the most durable, the scarcist and the best looking.
It never goes bad. It doesn't shrink, tarnish or corrode. It is easily worked into durable, wearable items that enhance one's appearance because of the beauty of the metal against the skin. Even though it is heavy, one could benefit from carrying it around wrapped around the head, the neck, the wrist, the waist, the ankle and the toe. Virtually anywhere one put it, it attracted the light and the eye. And by wearing it, one could guard it better.
Then, as now, a certain amount of visable wealth can lead others to make assumptions about you that are not necessarily true. Women used it to enhance their beauty and value to suitors. Men used it to advantage in business and politics.
Why do we need to own some today? Pretty much the same reasons apply. Given the choice between a $30,000 car, a $30,000 horse, a $30,000 painting, $30,000 in stock and a $30,000 bar of gold. Which would you choose? Which will be worth more in 10 years? Which will be worth more in 100 years?
Most of us choose the car because the ease and speed of transportation can provide us the means to earn many times the $30,000 price before the car eventually dies. But... what if we already have the car, the horse, the painting and the stock and we have another $30,000?
My point is that given the wealth that is ours in America, gold shouldn't be the first thing we buy or the last, but somewhere in-between, it makes sense as a durable, portable, beautiful store of value. It's useful in the short term as protection from catastrophe and in the long term as a store of value that time and the elements won't diminish. Not because of what we can do with it but because you can't destroy it.
Like land, it acts as the anchor in the center of a well constructed portfolio. After the car is junked, the horse dies, the painting disappears and the business dissolves (business mortality rates are 100%), the land and the gold will still be there staring your descendants in the face.
Dirt's good, too, but its having some valuation and liquidity problems right now. This spells opportunity or disaster. Opposite sides of the same coin. Gold goes through the same problems from time to time but it comes in much smaller increments than dirt which allows you to better control the risk.
Just remember, Bwana, through moderation, diversification and patience is the path to a kick-ass portfolio but it doesn't hurt to be clairvoyant.
Gold is easily portable, up to a point. So are diamonds, bearer bonds, and Rembrandt paintings; probably more portable than bullion bars. The street value of each varies over time. Picking the right one at the right time is tricky.
Gold is the universal currency, against which all other money is measured. You can convert it into whatever currency you need, wherever you're at. However, by itself, it is virtually worthless. You can't eat it or drink it. You can only exchange it for something more useful, e.g., a can of beans or a jug of water.
Consequently, it has no intrinsic value. It's the guy with the beans and water that tells you how much your gold is worth. You end up taking whatever price he gives you, because you have to eat and drink to survive.
Today, we assume the value of physical gold is determined by the free market. Unfortunately, gold and virtually every other traded commodity can be manipulated, and probably is. In the case of gold, a few banks control access to almost all the physical gold available for sale into the market. Recently, supply was restricted so much that even the US Mint had to suspend making gold coins. Yet the price of gold dropped dramatically. "Somebody" was able to significantly restrict physical gold supply while, at the same time, driving prices down. Perhaps they had huge short-gold positions and wanted to buy-to-cover at artificially low prices.
Gold is an inflation hedge. Maybe. Since gold is generally denominated in US dollars, as the dollar goes down, gold should go up. However, if gold was denominated in euros or yuan, it would look considerably "cheaper." If we had expected gold to match the rise in inflation since we went off the gold standard, it would have to be several thousand dollars an ounce today.
Gold is a timeless store of wealth. It doesn't rust or rot or get devalued by people "printing" more of it. Another good argument but not great. Gold has maintenance costs, such as safety deposit boxes, or security on the chest buried in your back yard. It's portable, so its high on the list for thieves. It ties up a lot of purchasing power without paying dividends. You don't earn anything on it until you sell it, if you can sell it for more than you paid.
So, I ended up in the camp that says owning gold is nice, but buy it for its decorative and psychic values, not as a long term investment. You'll make more on it trading "paper" and won't have to pay for storage. If the world crashes to the extent that paper currencies are worthless, gold will be worthless too. A can of beans and a jug of water will be golden. For that world, you need to invest in vegetable seeds, well-digging equipment, firearms, gunpowder, and lead.
"supply was restricted so much that even the US Mint had to suspend making gold coins" - there was and is no supply restriction of physical out of refineries for 400oz bars, it is the supply of blanks to the US Mint that fell behind retail demand.
Who sets the price on COMEX - you and me, or the "highest bidder" who has access to that exchange?