“A pet rock” is how a noted financial columnist has described gold on a couple of occasions within the past year or two. Which is not surprising given the premise for the logic used to arrive at his conclusion. That premise, or assumption, is the reason that most people (financial writers, advisors, investors, and economists included) are incorrect in their analysis of the yellow metal.
That premise/assumption is that “gold is an investment”. It is not. It is also not insurance or a hedge against chaos. It is real money.
And there is only one thing anyone needs to know with regards to the value of gold. And that is the value of the U.S. dollar.
Gold is quoted in U.S. dollars and the dollar is the worlds reserve currency. The “price” of gold in U.S. dollars is an inverse reflection of the value of the U.S. dollar. And yes, it does change continuously, and ongoing. And yes, there are more extreme changes for short periods of time which don’t correlate exactly to changes in purchasing power of the U.S. dollar. But the most extreme changes occur after longer periods of time when the cumulative effects of inflation are recognized more fully by holders of the depreciating paper currency (i.e. U.S. dollar). And since paper currencies (including and, especially, government debt) can be manipulated by government, expectations and reactions become more volatile.
Without a clearly explicit understanding of the above paragraph, we will continue to see unexpected results which defy our logic if we ‘invest’ in gold as a “hedge against the chaos and resulting breakdown of society”; unless that chaos results in a significant decline and/or breakdown of the U.S. dollar itself.
What is particularly ironic is that the writer states in his article “gold has also preserved its purchasing power over remarkably long periods”. Which is exactly the point. Gold is a store of value and, hence, real money. It is the U.S. dollar which is volatile, and which continues to lose value.
With respect to concerns about some of the more dramatic changes in the value of gold vs. U.S. dollar over shorter periods of time, most of the time when those particular examples are cited, they are referenced to the exclusion of more telling facts.
For example, it is a well-known fact that gold in January 1980 was valued at $800.oo to the ounce and that its value in U.S. dollars some twenty years later was $275.00 to the ounce. Sounds horrible if you are looking at gold as an investment, right? Of course. But lets assume that our logic based on a faulty assumption (i.e. that gold is an investment) is correct. And then what would have happened if you had bought gold at $275.00 to the ounce in 1999? Its recent value at $1250.00 to the ounce is a nearly three hundred fifty percent increase. And what if you had bought gold prior to 1980? What if you were prescient enough to exchange your U.S. dollars for gold in 1971 at $35.00 to the ounce? By 1980 you would have a profit of nearly twenty-two hundred percent! Are these examples any less valid? No. It is a matter of perspective. And that perspective gets clouded sometimes depending on an individual’s point of view.
Quoting from the same article, “In the shorter term, gold fluctuates so wildly that it is a surprisingly poor hedge against increases in the cost of living.” Does that mean that stocks and real estate are also “poor hedge(s) against increases in the cost of living”? How would your stock broker answer that question?
For most of my lifetime (sixty-eight years) I have owned gold for what I think are the right reasons. It may be a ‘pet rock’ to some folks, but to me it is real money.