Gold has been characterized as insurance, the hedge against inflation/social unrest/instability, or, more simply, just a commodity. But it is treated most of the time, by many people, as an investment.
This is true actually by those who are more negative within their attitude towards gold. “Stocks are a better investment. ” In most cases, the particular logic used and the performance outcomes justify the statement. But the idea is wrong. Gold is not a great investment.
When gold is analyzed being an investment, it gets compared to all sorts of other investments. And then the specialists start looking for correlations. Some say that an ‘investment’ in gold will be correlated inversely to stocks. Yet there have been periods of time when both shares and gold went up or even down simultaneously.
One of the commonly voiced ‘negative’ characteristics about gold is it does not pay dividends. This is often cited by financial advisors and investors like a reason not to own gold. However…
Growth stocks don’t pay dividends. When was the last time your broker advised you to stay away from any stock because it didn’t pay a dividend. A dividend is NOT extra income. It is a fractional liquidation and payout of the portion of the value of your stock in line with the specific price at the time. The price of your stock is then adjusted down by the exact amount of your dividend. If you need income, you can sell several of your gold periodically, or your own stock shares. In either case, the procedure is known as ‘systematic withdrawals’.
The (il)logic proceeds… “Since gold doesn’t pay attention or dividends, it struggles to compete with other investments that do. inch In essence, higher interest rates lead to cheaper gold prices. And inversely, reduce interest rates correlate to higher gold prices.
The above statement, or some variation of it, shows up daily (almost) within the financial press. This includes respected publications like the Wall Street Journal. Since the US elections last November, it has appeared in certain context or other multiple times.
The statement – and any variation of it that implies a relationship between gold and interest rates – is false. There is no correlation (inversely or otherwise) between gold and interest rates.
We know that if interest rates are usually rising, then bond prices are usually declining. So another way of saying that gold will suffer as interest rates rise is that as bond prices decrease, so will gold. In other words, precious metal and bond prices are positively correlated; gold and interest rates are inversely correlated.
Except that all during the 1970’s – when interest rates were rising rapidly and bond costs were declining – gold went from $42 per ounce in order to $850 per ounce in 1980. This is exactly the opposite of what we might expect according to the correlation theory mentioned earlier and written about often by those who are supposed to know.
During 2000-11 gold increased from $260 per ounce to a high of $1900 for each ounce while interest rates declined from historically low levels to actually lower levels.
Two separate years of considerably higher gold costs which contradict each other when viewed according to interest rate correlation theory.
As well as the conflictions continue when we see so what happened after gold peaked in each case. Interest rates continued upwards for many years after gold peaked in 1980. And interest rates have continued their own long-term decline, and have even breached negative integers recently, six many years after gold peaked in 2011.
Individuals also talk about gold the way they talk about stocks and other investments… “Are a person bullish or bearish? ” “Gold will explode higher if/when…
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inch “Gold collapsed today as… inch “If things are so bad, why isn’t gold reacting? ” “Gold is marking time, consolidating its recent gains… ” “We are fully invested in gold. ”
When gold is characterized as an investment decision, the incorrect assumption leads to unexpected outcomes regardless of the logic. If the basic idea is incorrect, even the best, many technically perfect logic will not lead to results that are consistent.
And, inevitably, the expectations (unrealistic though they might be) associated with gold, as with anything else today, are incessantly short-term. “Don’t confuse me with the facts, man. Just tell me how soon I can double my money. ”
Individuals want to own things because they expect/want the price of those things to go up. That is affordable. But the higher prices for stocks that we expect, or have seen in the past, represent valuations of an increased amount of goods and services and productive contributions to quality of life in general. And that takes period.
Time is of the essence for most of us. And it seems to overshadow everything else to an ever greater degree. We no longer take the time to understand basic fundamentals. Simply cut to the chase.
Time is just as important in understanding gold. In addition to understanding the simple fundamentals of gold, we need understand how time affects gold. More specifically, and to be technically correct, we have to understand what has happened to the US dollar over time (the past one hundred years).
Lots of things have been used as money during five thousand years of recorded history. Only one has stood the test of time – GOLD. And its part as money was brought about by the practical and convenient use over time.
Gold is original money. Paper currencies are substitutes for real cash. The US dollar has lost 98 percent of its value (purchasing power) over the past century. That decline in value coincides time wise with all the existence of the US Federal Reserve Bank (est. 1913) and is the particular direct result of Federal Reserve plan.
Gold’s price in US bucks is a direct reflection of the deterioration of the US dollar. Nothing a lot more. Nothing less.
Gold is stable. It is constant. And it is real money. Since gold is priced in US dollars and since the US dollar is in a state of perpetual drop, the US dollar price of gold can continue to rise over time.
There are continuous subjective, changing valuations of the US dollar from time-to-time and these modifying valuations show up in the constantly fluctuating value of gold in US bucks. But in the end, what really matters is what you can buy with your dollars which usually, over time, is less and less. What you can purchase with an ounce of gold continues to be stable, or better.
When precious metal is characterized as an investment, people buy it (‘invest’ in it) with expectations that it will “do something”. But they are likely to be disappointed.
At the end of 1990, there was a good deal of speculation about the potential effects on gold from the impending Gulf War. There were a few spurts upward in price and the panic increased as the target date for ‘action’ grew near. Almost simultaneously with the onset of bombing by US forces, gold backed away from sharply, giving up its formerly gathered price gains and actually moving lower.
Most observers describe this turnabout as somewhat of a surprise. They attribute it to the quick and decisive action of our forces and the results achieved. That is a convenient description but not necessarily an accurate one.