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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: (1) Gold is not an investment and (2) Gold is not a hedge against inflation.
This post by Lorimer Wilson, Managing Editor of munKNEE.com, is an edited ([ ]) and abridged (…) version of a post by Kelsey Williams
GOLD IS NOT AN INVESTMENT
…To be considered an investment, gold’s value must have the potential to increase over time. Gold’s value, however, is constant and unchanging. 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 U.S. 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 U.S. 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 U.S. 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…There is no hedge against government action to create and destroy its own money; but gold [which], when used properly, can act as a restraint on governments tendency to do so.
WHAT GOLD IS
Gold’s higher price in dollars, over time, is an inverse reflection of the decline in purchasing power of the U.S. dollar…[so] 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.
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What he also didn’t mention are 2 things. One, is the relationship between a governments debt and gold. As an example, when gold was at $20/oz and was reset to $35/oz it was to monetize the debt. If the monetization of the current government debt would occur, then using the same formula that was used back in 1934, the price of gold would be between %5000 and $10000. And Two, I totally disagree with his assumption that the price of gold is directly tied to the price of the dollar. Yes, there is some commonality there, but for the most part the current price has been so manipulated by banks and hedge funds to the point of that relationship to the dollar is meaningless.
This article addresses the two points it set for itself, but that’s all.
A broader, and more satisfying, perspective would address gold’s value and how it is established.
A broader perspective would address the pricing of gold, and how it has been choked by dollar policy, by illegal market tricks, and by the introduction of paper gold.