bowman711

Gold ETFs: What Went Wrong With Conventional Wisdom?

I think one other element can be added to the discussion about gold. The PRICE of gold does not necessarily reflect the VALUE of gold. Historically, gold has been considered to be a store of value. That means that no matter whether there is inflation or deflation, gold will eventually find its same level in relation to the rest of the economy. Therefore, if 500 ounces will buy a$400,000 house at a gold price of $800/oz it will still buy that same house (now a $200,000 house) with with 500 ounces of gold at $400/oz.. This is what is meant by saying that gold will hold its value.

Conventional wisdom would say that the massive 'bailouts' by the U.S. and most of the rest of the world would be highly inflationary. I think the reason that gold isn't responding to this is because of two reasons; first, it takes time, many months, before newly 'printed money' is reflected in the economy. Second, it looks to me like no matter how much governments introduce 'liquidity' into the economy, it is done through the banks, and they aren't lending it. Therefore, there is none (or very little) of these new dollars that is making it into the larger economy. Until that money makes it way into the larger economy, is won't create inflation.

Actually, we are right now in an historic fight between inflation and deflation, and so far it seems deflation is winning. Look at how much the stock market has deflated in the past few months. Consider how the real estate segment of the economy is being deflated. One could say that energy is also in an historic time of deflation from its highs.

If the economy is being deflated, gold will go down in price. However, once everything washes out, gold should find it historic value in relation to the rest of the economy. So, don't be too dejected if your hold holdings go down in price. If you hold them until the economy stabilized, you will probably own relatively the same portion of the economy, the same value, as you did when gold was much higher in price.