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Are the reasons we are supposed to invest in gold actually true?

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Are the reasons we are supposed to invest in gold actually true?

Are the reasons we are supposed to invest in gold actually true?

By: Joel Bainerman


There are many aspects of the gold issue which need to be addressed and viewed in a fresh, new manner. Here are three of them:

1) Gold is worth whatever amount of fiat currency paper notes it will fetch

For instance, the gold bull analysts on the Internet like to tell us that "gold is not anyone's debt- it has its own intrinsic value- irrespective of how much fiat currency notes it buys".

Let's look at this contention more closely.

An ounce of gold may be worth an ounce of gold- just like it was 2000 years ago- and today- it's still an ounce- but that is not the point. The point is how many fiat currency paper notes one can trade that ounce of gold in for- today- or in the future.

We live in a world which revolves around fiat currency notes- like it or not- for better for worse. It would be foolish to expect Central Bankers to wake up one day and convert to a gold standard because the ladder is moral and former is not. Nor should we assume that they will be forced to do that- as they control all the levers in this game- we don't.

We all invest in gold for that reason- to either protect what we have today- that it will still be there in the future- and that means one day- trading our ounce of gold in for fiat currency paper notes. My hunch is that most gold bulls who own gold don't wear all that much jewelry. So if not- then let's all admit we own gold so we can trade it in one day for a lot more fiat currency paper notes than we bought that ounce of gold for- and stop with this gibberish such as "I own gold because it is "honest money." Everyone has their price and gold bugs are no different. While gold bugs may like to think of themselves as having a higher sense of morality when it comes to economics- their sense of morality is not the issue. What the Central Bankers do is.

So either the goal is to sell it one day- or it isn't. If you never sell your gold- and just sit and look at it- then this issue doesn't matter to you. You obviously are wealthy enough where you can put a portion of your asset base into gold bars- and come home every day and look at it.

However for most of us- there comes a day when we want or need to sell it. When that happens- the sellers of gold have to worry about what does one get for it IN FIAT CURRENCY PAPER.

There is no way around this issue because the owners of the system- the Central Banker- have deemed it to be that way. Gold is priced only in US dollars (and other fiat currencies) for a very good reason: the Central Bankers can better control it if the asset is valued in a commodity or unit of measurement that they control.

So yes, an ounce of gold is an ounce of gold- and it doesn't represent anyone else's debt- but so what? The value that we place on it is how many fiat currency paper notes it buys- and nothing else- unless we chose to wear it on our fingers or around our necks.


2) The track record of gold for protecting wealth is not stellar

Is gold really a good hedge against inflation like the gold bulls say?

You decide.

If you bought an ounce of gold in 1991 when gold was selling for a yearly average of $361- would you be have protected yourself against the last 14 years of a devaluating US dollar? How happy would be to see your asset today having a total market value of $425 fiat currency notes- after holding on to that asset for thirteen long years?

An ounce of gold purchased for $447 in 1987 has lost a lot of value against inflation over the last 17 years. If I held an ounce of gold from 1987 until today- I would consider it a terrible investment decision. Wouldn't you? You would have made a measly $22 in the 18 years of being invested in this asset- and the cost in a weakened US dollar of 17 years of inflation.

Now be honest. If you bought an ounce of gold in 1987 for $447 US fiat currency paper notes- and kept it for 18 years- would you do it all over again?

Here is something else to ponder: How come the price of gold goes down if we know inflation occurs each year?

An ounce of gold sold for $277 in 2001. Twenty one years earlier it sold for an average of $615. In 1985 the average price of gold was $317- $47 more than it did in March 2001? If you had bought an ounce of gold in 1985 and sold it in 2001 you not only would not have protected yourself against inflation- you would have actually lost $47.

If gold is supposed to protect us against inflation- the price of it should never go down- regardless of what the actual demand is for it in the market. If not- then gold really doesn't perform the function of protecting us against inflation, does it?

Perhaps one of the gold bull analysts can answer that question for us little guys so we have all the facts when it comes to investing in gold.


3) Does political instability really have an effect on the price of gold?


To answer this question, let's look at the facts:

Let's go back 25 years (I know many gold bulls like to talk about events that happened 75 years ago and how it will all be the same today- but I wasn't alive then so 25 years is more relevant to me and to most of the investing public). The average price of gold in 1980 was $615. A year later it had gone down to $459. By 1985 to $317. In 1990 it was up to $383, in 1991- the year of the first Gulf War (which occurred in January of 1991)—it went down to $362. In 1995 it had risen to $383. On September 11th gold sold for $287 and on December 26th sold for $276. The yearly average price for 2002 was $309- for 2003 $363- and for 2004- $409.

Can any of supporter of the notion that people should invest in gold to protect their assets because in times of world instability- gold rises in value- explain to me how gold sold for about 35% more in 1980- than it does today- despite 25 years of inflation and two wars in the Middle East- another one in Bosnia- a 911 and a "war on terrorism"?.

If world instability is such a big factor in the price of gold- and one of the reasons we should all put our money in this asset class- how come an ounce of gold sold for $11 less on December 31st, 2001 than on September 10th, 2001?

If world instability is such a factor in the price of gold- how come the price didn't rise immediately following 911? Can we blame this only on the mainstream investment community's tendency to "ignore gold as an investment" or that "Forbes and Fortune never report on the advantages of holding gold?"

By March 2002- six months after 911- after the invasion of Afghanistan- gold sold for $295- just $8 more than it did on September 11th. On September 11th, 2002- gold sold for $315- $28- about 10% more, than it did on 911?

Where is the political instability factor that is supposed to drive the worldwide gold market? Certainly an event as earth shattering as 911 should have had lots of people "fleeing to gold in uncertain times". If so- then how come the price didn't rise?

The average price for gold in January 2003- three months before the US invasion of Iraq- was $356. The average price for April was $328 and for May- $355. If political instability causes the price of gold to rise- how come gold actually fell in price after the invasion of Iraq?

Either I am missing something here- or gold is only slightly affected affected by world events. If I am right, then the argument that we should put our assets into gold because of the world is going through unstable times- is bogus, pure and simple.

The reason is that gold is not a free market

Fact is, the gold market is not free- and does not offer long term protection against the effects of inflation. The average yearly price of gold should never go down- if gold was serving as a function of protecting one's assets- as long as there was inflation each year.

Considering the enormous political instability that has occurred in the world since 911- or even since the first Gulf War in 1991- and all through the 1990s- there was enough cause for concern in the world's stability to have gold selling for more fiat currency notes- year after year.

How come gold was selling for just 270 US fiat currency paper notes in March 2001? If gold was a free market- one could argue that is what it was worth- and all that the market was ready to pay for it. How come back then hoards of investors didn't see how undervalued gold was then- or even five years earlier? Why does the mainstream business press totally neglect the whole subject of gold? Why are the estimates of the World Gold Council so different than those of the gold bug analysts?

Because this is not a free market- and gold doesn't go up or down based on any of the factors that are presented as levers for the price of gold. It certainly does not serve as a long term protector of wealth- the historical record proves that. It also does not respond to increase in the levels of world instability- the immediate post-911 gold prices prove that.

Maybe our assumptions were wrong? As hard as that is to accept- denying it is definitely more foolish.

It seems that while gold may go up 7-10% a year over the coming few years- at the rate this bull market in Precious Metals is going (we are into the fourth fourth year if anyone is counting) it won't even get to $700. The only reason why we are calling this a bull market in gold is because of the low benchmark of $270 in the spring of 2001. Nobody seems to be considering the base with which this current so-called bull market in gold began?

So the price has risen 50% since then- big deal. The US dollar has gone down in value 40% and inflation continues to eat away at those fiat currency paper notes. Measured in any other world currency there has been almost no increase in the price of gold over the past four years.

So where is this great, big bull market for gold that the gold bulls keep talking about? I fail to see it.

What do we have to look forward to in the future?

Let's look at what happened last week.

If anyone thinks that the IMF just suddenly decided to announce they may sell gold off to pay off third world debt- was just "by chance" they are extremely na´ve. This is an organization that hasn't revalued its hold holdings since gold was selling for $47 an ounce (one wonders who gave them all that gold in the first place- and if they have so much of it- how come they receive annual allotments of fresh capital from wealthy countries?).

All of a sudden- one announcement (that is all it was- as nearly every single analyst said it was unlikely to happen) and the gold price drops $20. We all know who controls the IMF- and for what reason. One press release and it will take the price of gold months to recover.

So when I say the gold price is unlikely to explode- I mean the powers-that-be are not going to let it explode- and this announcement and an entity that is controlled by Central Bankers is just one weapon in their arsenal to use to keep the gold price from escalating. Creating gold out of thin air via futures- is another one- and no amount of moral belly-aching is going to stop them from doing what they must to keep their fraud going. Us little guys just can't win in this rigged game. That isn't an "anti-gold" opinion- merely a fact of life that has to be reckoned with.

And if so- it is about time the gold bull analysts stopped telling us every time that gold weakens that it is a "a new buying opportunity" or "patience will be rewarded." While it is may be a very difficult fact to accept- the truth is that buying and holding on to physical gold is a lousy investment because the powers-that-be have a vested interest in keeping the price of gold low. There is simply nothing any of us can do about this just like there is nothing any of us can do if Rumsfeld, Bush and Chaney decide to attack Iran. . As awful as it is to admit that- it is the truth about the potential for gold to skyrocket- denying it any longer is downright foolish.

So to all those gold bull analysts out the in cyberland- if I have made some critical error in my calculations and observations- it is up to you people to speak up and write about them in your columns. Correct the errors in my logic. You all have been the major voices out there on the Internet in support of gold. If you can't provide a rebuttal to the major arguments that I have presented in this essay- then perhaps there may not be one. If you all remain silent against and simply chose to ignore my claims- then that too will be a conclusion.


if U are a half black, half white investor, U can mentally switch from a bull to a bear in a twinkling. Good investors learn not to care what the mkt does; they just want to be on the right side. It's expensive to care. Leave caring to human relationships, not mkts" Harry Schultz

From my point of view, the investors are the big gamblers! They make a bet, stay with it, and if it  goes wrong, they lose it all! 
Jesse Lauriston Livermore