There have been several articles recently proclaiming and detailing the fundamentals for gold. A few of them have some excellent points. Most of them don’t.
And there have been some polite discussions of applicability, meaning, and intent with regards to specific claims.
Some of the discussions involve protracted technical analysis and are quite lengthy. And some analysts have a special formula or barometer of their own, which they use to justify their claims or indicate correlation between gold and a wide variety of unrelated items.
There are commonly accepted – sometimes erroneous – statements of fact and also convoluted explanations which are unclear and long-winded.
A bit of brevity might help. The definition of fundamental is as follows:
“a basic principle, rule, law, or the like, that serves as the groundwork of a system; essential part…”
There is only one basic fundamental that needs to be known about gold: Gold is real money.
To further clarify, this means that gold is not an investment. Nor, is it a hedge against inflation or deteriorating world conditions. It is also not insurance; or a commodity with special attraction; or a barbarous relic.
Do people view gold as an investment? Absolutely. Which is why they are continually surprised and confused at their investment results. They buy gold (invest in it) because they expect the price to go up. Which is logical.
The problem is that the premise is wrong. When someone invests in gold, they are expecting the price to go up as a result of certain factors which they believe are “drivers of gold”. In other words, they believe that gold responds to certain factors. These factors include interest rates, social unrest, political instability, government policies/actions, a weak economy, jewelry demand, and various ratios comparing gold to any number of other things.
But, again, that assumes that gold is an investment which is affected by the various things listed. It is not.
Have you ever “invested” in money? More specifically, when was the last time you called your financial advisor and placed an order for U.S. dollars?
Gold is quoted in U.S. dollars and the dollar is the world’s reserve currency. The ‘price’ of gold in U.S. dollars is an inverse reflection of the value of the U.S. dollar. The changes in price are continuous and ongoing. Confidence (or lack of it) and expectations (realistic or not) play a part. And yes, there are more extreme changes for shorter 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 and credit 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.
If gold is real money, and not an investment, then what determines its value? Its value is in its purchasing power. Gold, or any other money, is worth what we can buy with it. And gold’s designation as ‘real’ money is precisely because it is a store of value.
Gold is original money. It was money long before the U.S. dollar. And it will still be money after the U.S. dollar meets its inevitable end.
By definition, if someone does not believe that gold is real money, then they are saying that something else is. And that is why it is difficult for most people to understand and analyze gold.
Most people tend to equate money with wealth and abundance. This leads to inevitably placing value on things in terms of how many dollars an item is worth. Viewed this way gold seems to hold no value unless it is continually rising in price according to our own expectations and investment logic.
When gold is viewed and treated as an investment, it complicates things. And it is not just a matter of a difference of opinion.
Applying investment logic to gold leads to erroneous conclusions. Gold does not react or correlate with anything else – not interest rates, not jewelry demand, not world events.
Changes in gold’s price are the direct result of changes in the value of the US dollar. Nothing else matters.
Insisting that interest rates (either nominal or ‘real’) affect the price of gold is incorrect. As far as gold is concerned, it does not matter what is happening to interest rates. It might matter to the U.S. dollar.
Whether interest rates – real or nominal – are rising or declining does not impact the price of gold. Changes in the value of the U.S. dollar do.
This is true of all the other factors which people assume have an impact on the price of gold, too. It is the U.S. dollar – and only the U.S. dollar – that causes changes in the price of gold.
Historically, there is no period of time of any consequence in the last one hundred years, wherein the price of gold in U.S. dollars rose when the value of U.S dollar was not declining. The inverse is also true. Periods of decline in gold’s price were reflected inversely in the rising value of the U.S. dollar.
All of this is in the context of an intentional, century-long decimation of the U.S. dollar’s value by the Federal Reserve and the U.S. Government.
Inflation is caused by government. The effects of that inflation show up gradually, generally, in the form of rising prices for goods and services. Since the U.S. dollar is a substitute for real money (i.e. gold) it is particularly vulnerable to the effects of the government’s inflation. Which is why it has lost more than ninety-eight percent of its value over the past one hundred years. And why the price of gold (real money) reflects that decline in value at $1220.00 per ounce. Otherwise, gold would still be at $20.00 per ounce (or close to it) and would be equal in value to $20.00 in U.S. currency as was the case in 1913 when the Fed “was born”.
The U.S. dollar is terminally ill. It cannot be saved. Only sustained. The Federal Reserve knows this. Which is why the ‘can’ of responsibility is always kicked down the road.
(also see: History Of Gold As Money)