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January 06, 2009



The fact that gold has increased for the past eight years could simply mean that it will be the next bubble to burst.

After doing some research on this subject recently, it is my opinion that gold is a very poor long term investment, both as a hedge against inflation or as a practical currency of exchange.

I remember the first time I began hearing that gold was a superior long term investment. It was in the early eighties when interest rates were 17% - 18% and unemployment was in the double digits. Much like we hear today, it supposedly could only go up in value, at least according to all the advertisements and gold brokers. The truth, however, is that gold was selling at a peak then close to $700 (1980) http://goldprice.org/30-year-gold-price-history.html and did not return to that price for another 24 years. Even with today's rates approaching $1,000, and even unadjusted for inflation, that's only a 30% increase over a 29 year period! A simple CD or a saving account would have easily outperformed gold in a lot less time. In fact, can you imagine what a comparable investment in a CD or treasury bill would yielded at the then 11% - 13% rates?

Of course, if there was a return to the gold standard, whereby it was used to back our currency, then maybe gold would be a worthwhile purchase. If things continue to slide, I guess there's that chance, but I think there is a greater chance of a whole new currency if the financial system really tanks. But that's just one opinion, which there are certainly many to go around right now.

Finally, I've read that 70% of gold is used for jewelry, and the rest mainly for manufacturing. Therefore, I do not see where it has any real intrinsic value for anything other than its intended purpose. Again, if the economy continues to go south, especially if it REALLY goes south, I doubt there would be much demand for jewelry. Rather, food, water, and oil would be the commodities of choice.


Correction on a reference in last comment: 45% increase over 29 years or an average 1.5% per year.


You mentioned that you respect Ron Paul and Peter Schiff. Both say that you're absolutely wrong about gold. Schiff says Gold will be 2,000 an oz by the end of this year, and somewhere over 5,000 an oz in 5 years. This of course ignores that gold has hands down outperformed the DOW from its inception to today (which lost nearly half of its value since last year or so).

Also, people who say "gold doesn't have any intrinsic value" neglect the theory of money. Bear in mind that "money" has intrinsic value just by being money--it's always in high demand because it keeps economic participants from having to find someone who wants the exact "stuff" they have (often through multiple cumbersome steps). There is a light-work post directly addressing this point, but I didn't bother to find a hyperlink to it. (I'm in Labor Relations right now, so not being as rigorous as usual). Anyway, the point: "money" may not be edible, shelter, or clothing, but it allows you to procure all of those things and THAT means it will ALWAYS have an intrinsic numismatic value.

The question, then, is "what is money?" The answer is: money is something someone is willing to accept as a payment because they can trust they will be able to, in turn, trade it for something they want later. There's a difference between there being trust and that trust being well-founded. (Look at all the folks who thought CDO's were a sure thing; I mention it only to point out that there are two kinds of trust: well-founded and poorly-founded.)

Gold's value doesn't engender mistrust. It has intrinsic numismatic value in spades and if there's flight out of the dollar, demand for it will catapult into the stratosphere. This is especially true where there has been massive unsustainable price manipulation, as in the case of both gold and silver via naked-shorting, gold-leases, fractional reserve systems and various other cheating measures institutions have thus far employed. All kinds of artificial down-ward pressure has been brought to bear on the spring of metals prices. When all that pent-up energy can no longer be contained, it will surge upward with extra momentum.

Again: gold isn't the only refuge from what's coming, but it is far better than a CD, a debenture, bond, or stock, i.e. in anything whose earnings are skewed (as are virtually all securities one might usually acquire in U.S. financial markets right now). People who put their money elsewhere are going to take a bath in the long run. Period. The fundamental assumptions that underlie the financial establishment's conventional wisdom have all changed unnoticed. People buying into that dangerous consensus will get hosed.


Here are two excellent links outlining a real analysis of why metals prices are undervalued.




Also, here's the light work post that explains where the theory of "real" value and money (metals) comes from.




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