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I am passionate about learning and teaching as I learn, which I also believe will help me learn at a faster rate than if I kept the info to myself.
  • What so many people fail to understand about debt, gold, bonds, inflation, etc 0 comments
    Aug 2, 2011 8:19 PM | about stocks: SPY, GLD, SLV
    There are many people around the world that have caught the bug... the gold bug. Whether a good thing to do or not, there are so many myths around the topics of US treasury bonds, inflation, gold, debt, currency, money supply, etc. It's important that you understand them so you can make a more informed investment decision.

    Myths:
    1)The US government prints money 
    2)Gold is always a good hedge against inflation
    3)Gold has nothing to do with the bond market
    4)Gold is more rare than silver
    5)Silver and gold go up for the same reasons
    6)Gold is worth more because it's more valuable
    7)Something scarce is always more rare than something abundant
    8)hyperinflation is always the result of too much money

    Here are some facts that many people
    1)The US Treasury does not print money they print bonds
    2)Gold is almost never a hedge against inflation, it is only a hedge against hyperinflation or default, 2 possible results of the same problem... government inability to pay their bond holders.
    3)Gold has EVERYTHING to do with the bond market because ALL markets are interconnected. If you want to sell something and buy something else, you have to first SELL it 
    4)If measured in number of ounces, Gold is in fact more rare, however it is very misleading. Silver is being consumed and used in electronics, car parts, solar panels, water filters, and countless industrial goods. 

    5)Gold is a play that almost exclusively plays on the governments inability to pay because it has a limited amount of utility. It is only used in jewelry and dentistry, but the real utility is as an "investment hedge". Silver on the other hand is much more scarce in supply in terms of "years left", but it is actually very abundent in raw amount. If you believe there will be industrial growth silver will do well. However, silver is often also used for the same reasons as gold, but silver will also have a demand for other reasons.

    6)Gold is not neccesarily more valuable than silver. Due to the explosion of consumption of silver, and the inability to easily access silver in the next few decades, silver has become very valuable. However, the cost of storage is significantly less for gold than silver as for every one ounce of gold you buy you could buy 40 ounces of silver. That means that if you need to buy storage space by the ounce, storage fees will be 40 times greater for silver. As such gold gains investment utility based strictly on it's price. Also, there is an illusion of scarcity with gold as it is often used for investment purposes and it is in fact rare in total number of ounces. When gold becomes in strong demand, silver tends to spike rapidly because when gold is hard to access, investors turn towards silver, which previously was used mostly as an industrial metal. For this reason in the 70s when gold spiked, the gold to silver ratio dropped to 16 as silver closed the gap in price.
    On the other hand, you could easily argue that the future there will be the advancement of technology that requires gold and becomes vital to our way of life. For example, 100s of years from now if we colonize space and travel across the galexy, gold could potentially have significant value .

    7) There are currencies around the world that are very scarce that don't have much value. In fact they don't have much value because they are scarce. If I invented my own currency, no matter how unique, no one would accept it first because it would not be legal tender, second because no one else would trade it. Additionally, what is a central bank or a hundred billion dollar company going to do if it wants to protect it's asset and move 10 billion dollars into somewhere safe? Would it buy up the entire supply of a rare african beatle? Or would it move the money quickly into an asset that is very liquid?

    8)Hyperinflation can occur if goods and services get bombed out. So much for the myth that war is productive. Inflation can also occur if a currency isn't taken seriously. It's not even always "too much goods chasing too few supplies". At one point Disney Dollars were used. Once you go outside of Disney Land, they were worthless. Hyperinflation in that case occured once you tried to use the currency elsewhere. From my understanding, Disney no longer makes the currency. Lets assume they don't if this assumption is wrong. As such, it is very rare. Yet if you go to Disney and try to buy something using Disney dollars, almost no one will even accept it. If you're lucky, you might pay the highest bidder to exchange it for an item or 'real cash', but you would be lucky to get even the slightest fraction of what you originally bought. Despite the fact they did every possible thing to cause deflation (stopped printing more of it), it no longer became valuable simply because they stopped accepting it.

    Ultimately things are much more complicated than some people like to make it, but they don't have to be as complicated as still others try to make it.


    I could go on with the myths. Usually general beliefs get held onto even when the environment changes, and this causes stupidity. Here's an example...
    A woman I knew cut the end of the meatloaf, or any other food she prepared off before she put it in the pan, and threw it out because her mother always would do it. She had no idea why, she had just learned by watching her mother. She finally asked her mother and she laughed saying "I just cut the edges off so it would fit into the pan". While that's an extreme example, there are plenty of really book smart people that hold onto certain "accepted" ideas that may have made sense at one point, but may not work in reality...


    I would be glad to kill any other sacred cows because typically any time you say something and assume it's always true, you will have an oversimplification that is not always true.

    I am going to write another post about how high interest rates can have the opposite consequence of the intended one of "lower inflation".






    Stocks: SPY, GLD, SLV
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