WHAT GOLD IS NOT
After reading recent articles by others and listening to what continues to pass as ‘fundamentals for gold’, I think it might be helpful to restate, and elaborate on, two specific things which gold is not…
- Gold is not an investment.
- Gold is not a hedge against inflation.
GOLD IS NOT AN INVESTMENT
According to Investopedia:
“An investment is an asset or item acquired with the goal of generating income or appreciation.”
Since gold is not a producing asset, i.e., no dividends or interest, the remaining objective can only be to acquire gold and hold it for appreciation purposes.
Appreciation is an increase in the value of an asset over time...
“When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.” …Investopedia
The implication in the definitions and statements above is that as an asset increases in value over time, it creates wealth.
If gold is an investment, what is its value? Gold’s primary value is in its use as money. Gold is original money and the original measure of value for everything else.
To be considered an investment, gold’s value must have the potential to increase over time. Gold’s value, however, is constant and unchanging.
Below is a chart of gold prices for the past century. The prices are adjusted for the effects of inflation…
Since the price of gold peaked in 1980, there has been NO INCREASE in the value of gold; and a lot of volatility on the downside. The volatility in gold’s price has everything to do with the US dollar – and nothing else.
If you owned one ounce of gold in 1980 at $650 oz. and owned it in 2011 at $1895 oz., and again in 2020 at $2060 oz., there has been no increase in value.
Sure, the price went up; but the increase in price reflects only the loss in purchasing power of the US dollar (the effects of inflation) and not any increases in gold’s value. Also, there is no reason to expect anything different in the future.
As such, gold is not an investment; nor has it ever been. (see Gold Not An Investment; You Won’t Get Rich)
GOLD IS NOT AN INFLATION HEDGE
Some people promote gold as a hedge against inflation. They are wrong on two counts.
First, they are incorrect in what they mean when they refer to inflation and second, gold is not a hedge against inflation.
Inflation is the debasement of money by government and central banks. The inflation is created by continually expanding the supply of money and credit. The expansion of the supply of money and credit cheapens the value of all the money in circulation, leading to a loss in purchasing power of the currency – the US dollar.
What most people usually mean when they say ‘inflation’ is an increase in prices.
A general increase in prices for most goods and services over time is the result of the loss in purchasing power of the US dollar. The dollar’s loss in purchasing power is an effect of inflation. The inflation, however, has already happened.
Inflation is an intentional creation of government and central banks. The Federal Reserve is always creating new money. Our banking system functions on a fractional-reserve basis. (see Fractional-Reserve Banking Is The Elephant In The Room)
Moreover, the effects of inflation are volatile and unpredictable. What happened in the 1970s was different from what happened after Federal Reserve actions in 2008 and again last year. And the intended effects of Fed inflation are losing impetus. (see Fed Inflation Is Losing Its Intended Effect)
Complicating matters is the tendency to refer to economic effects associated with supply demand issues as ‘inflation’ due to their impact on prices:
“The current share of rising prices resulting from changes in economic demand, such as supply chain bottlenecks, pent-up demand, etc. have nothing to do with inflation or its effects and are a totally separate factor in price changes for various goods and services.” (see It’s Not Biden’s Inflation)
There is no hedge against government action to create and destroy its own money; but gold, when used properly, can act as a restraint on governments tendency to do so.
WHAT GOLD IS
Gold is real money. It is original money. It is the measure of value for everything else. Its value comes from its use as money and that value is constant and unchanging.
Gold’s higher price in dollars, over time, is an inverse reflection of the decline in purchasing power of the US dollar.
Substantial price increases in gold of lasting duration come after the fact; not before.
We will need to see renewed, lasting, significant weakness in the US dollar, manifest in the form of much higher prices for everything we buy and sell, IF the gold price is going to move above above $2000 oz.
If that does happen, gold can help you preserve your wealth. Any increase in gold’s price would help offset the higher cost of living.
That is all you should reasonably expect from gold. To expect more than that is fantasy and delusion.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
The claim that gold is not an investment is also highly misleading. It all depends what the definition of investment is. Buying a stock or a bond is usually called an investment, but there is no guarantee that that investment will pay off. In fact, most companies go out of business and many bonds default leading to a total loss of that investment. One can gain and lose by buying gold short term. But one can not lose by investing in gold for 100 years.
One big fallacy about the stock market is the belief that the Dow Jones index is representative of the stock market performance. That is not true because the composition of the DJIA index is constantly changing. It gold were bought in 1900 and held as a buy and hold investment, it would be worth today a multiple of the purchasing price. If the equivalent amount of Dollars would have been invested into US Stocks as a buy and hold investment, today, 120 years after purchasing these stocks, most likely these stocks would be worth zero. Over time, every stock investment is going down to zero. That is because the life span of companies is finite.
The GM company of today is not the same company it was 20 years ago. People who bought the bonds of GM 30 years ago, lost all their money despite the fact that GM still exists, That is because the US government bailed out GM in 2008 under the condition that investors into GM would lose completely their investments.
So most investments do not pay off. Investing into gold is the only buy and hold investment that will survive centuries. No other investment can compete against gold in that respect.
It is that characteristic of gold which gave gold its historical reputation. The value of gold is in the constant demand for gold all over the world. Gold can be sold everywhere in the world at market price. US stocks and bonds can not be sold in many countries. US Dollars are not accepted for payment in most countries. One has to visit a forex office and exchange the Dollars into local currency in order to purchase anything. Only gold is accepted directly in every country without having to visit a specialized gold dealer. Every bank will buy that ounce of gold.
If gold is not viewed as a buy and hold investment, but only as a trading device, then positive rates of return (after inflation) can be realized by switching between gold, stocks, bonds and other commodities on a regular basis. Doing so is not easy, but it has been done by other people in the past.
William, you contradict yourself in that article. You say that gold is not an inflation hedge. Yet, later in the article you say that the rising price of gold is an inverse reflection of the declining purchasing power of the Dollar which is as you say in a different sentence, the consequence of an earlier inflation of the Dollar. So by logical conclusion, the rising price of gold is a consequence of the inflation of the Dollar. In other words, gold is indeed an inflation hedge, at least in the long term.
I feel that your arguments are inconsistent.
You also ignore the fact that the gold – Dollar price (viewed either as the price of gold in terms of Dollars or the price of a Dollar in terms of milligrams of gold) is being managed by central banks. Banks buy and sell gold on a regular basis. These purchases are large enough to influence the gold market. In fact, setting interest rates and managing the price of commodities including gold via the futures market is the main way the market value of the Dollar is managed. One essential tool of central banks acting in the market is secrecy.
To say that we are under a gold standard means that the price of gold is managed in a very tight range. Today, we are still under a gold standard because the gold price is still managed albeit in a much greater range than under a strict gold standard.
In a pure fiat currency standard with no gold price management, gold can not be purchased because it is simply not available for sale. That was the case in Nazi Germany and under Stalin in the Soviet Union. It is also the case today in many 3rd world countries, even those who are gold producers. An example is Ghana in West Africa, the ten largest gold producing country in the world, yet Ghanaians themselves are not allowed to buy gold. Foreigners can buy gold in Ghana but must obtain an export license from the Ghanaian Government if they want to take that gold out of the county, That export license makes gold purchases in Ghana uneconomical.
The increasing US dollar price of gold over time is correlated inversely to the loss in purchasing power of the US dollar. The loss in purchasing power is not inflation. It is an effect of inflation.
Inflation, itself, is the debasement of money by government and central banks via the expansion of the supply of money and credit. This “inflation” cheapens the value of all the money in circulation and leads to a loss in purchasing power. Again, the loss in purchasing power is an effect of inflation. The loss in purchasing power is reflected in the higher price for gold over time. The changing gold price in dollars does not tell us anything about gold. It tells us what has happened to the US dollar.
Gold is real money, original money. It is the original measure of value for everything else; and it is a long-term store of value. The value of gold is constant and unchanging. Gold is no more valuable today than it was 100 years ago; or 1000 years ago. That is why it is real money. Since gold’s value doesn’t change, it cannot be considered an investment.