3 Myths About Gold That Just Won't Die

Includes: GLD, SLV
by: Shaun Connell

Talking about gold often gets people riled up because it's one of the most polarizing markets in existence. I've had people contact me because of my own writings on gold to tell me I must be a "socialist" or a "gold bug". That was from the same article.

But like all markets, our understanding of it should be based on sound economic reasoning, consistent principles and analysis, and a healthy dose of skepticism.

Here are three myths about gold I wish would just die:

1. Everything should be "priced in gold."

Gold is a volatile market. It doesn't quite behave like money right now, because quite frankly, it isn't and hasn't been money.

Throughout the 90s, gold prices stayed roughly flat. The money supply increased throughout the 90s. And that's why you shouldn't try to find the "real" price of things "priced in gold" -- it's a sometimes useful, but often meaningless indicator.

Gold doesn't just behave like a medium of exchange, mostly because it's not really used as a medium of exchange necessarily -- not in the short run. In the long run, gold-to-[x] ratios are extremely useful, but not in the short run -- and it's nothing close to an exact science.

2. Inflation is coming, so gold will skyrocket.

Gold reacts to inflation fears, not inflation itself. That's why prices stayed flat throughout the 90s, generally speaking. That's also why it dropped so strongly throughout 1980, even though even with higher interest rates, inflation was still in the 10%+ range.

Gold reacts to inflation fears -- that means when the fears die down, the price will die down with it, leading to a potential new 1980s event. I've talked about this before.

I've routinely argued with people who are bullish on gold or silver (GLD or SLV) only to hear them explain that as long as the Fed is printing money, the price will keep increasing. This is a gross oversimplification of gold prices, and is a good way to get creamed during a correction or market shift.

3. The [doomsday scenario] will happen this year.

Doomsday predictions of hyperinflation and economic collapse are almost synonymous with some investors. Some have been predicting it for decades. I'm not saying it will never happen, but there's literally no way to "know" on the basis of the data we have that the world economy or hyperinflation will happen soon.

That's speculation -- and not rational speculation. It's a relatively educated guess at best. I'm not contesting that there won't be some sort of doomsday event -- just that right now, such predictions are almost always shots in the dark. Skepticism is far more profitable over the long haul.

Never underestimate the power of re-bubbling an economy. Yes, the piper must someday be paid, but that's probably not literally in the next year.

I like gold. It's probably my "favorite" asset. But the myths and the risky assumptions about it simply have to end -- blind investing is always bad, regardless of what the asset being invested in is.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.