gold is characterized InsuranceA rescue against inflation/social unrest/instability, or, more simply, just a Goods. but it is treated most of the time, by most people, as a Investment,
This is also true for people who are more negative in their attitude towards gold. “Stocks are a better investment.” In most cases, the logic used and the results demonstrated justify the statement. But the premise is wrong. Gold is not an investment.
When gold is analyzed as an investment, it is compared to all kinds of other investments. And then the technicians start looking for correlations. Some say that ‘investing’ in gold is inversely related to stocks. But there have also been times when both stocks and gold went up or down together.
One of the commonly expressed ‘negative’ characteristics about gold is that it does not pay dividends. This is often cited by financial advisors and investors as a reason not to own gold. but then…
Growth stocks don’t pay dividends. When was the last time your broker advised you to stay away from a stock because it didn’t pay dividends? Dividend is not additional income. This is a partial liquidation and payment of a portion of the value of your stock based on a specific price at that time. Your stock price is then adjusted downward by the exact amount of your dividend. If you need income, you can sell some of your gold, or your stock shares, from time to time. In any case, the process is called ‘systematic withdrawal’.
(il) The argument continues… “Since gold doesn’t pay interest or dividends, it struggles to compete with other investments.” In short, higher interest rates drive down gold prices. And vice versa, lower interest rates correlate with higher gold prices.
The above statement, or some variation of it, appears (almost) daily in the financial press. This includes respected publications such as The Wall Street Journal. Since the US elections last November, it has come up several times in some context.
The statement – and any variation in it that suggests a correlation between gold and interest rates – is false. There is no relation (inverse or otherwise) between gold and interest rates.
We know that if interest rates are rising, bond prices are falling. So another way of saying this is that as interest rates rise, gold will suffer, as bond prices fall, so will gold. In other words, gold and bond prices are positively correlated; Gold and interest rates have an inverse relationship.
Except that during the 1970s – when interest rates were rising rapidly and bond prices were falling – gold went from $42 an ounce to $850 an ounce in 1980. About is often written by those who should know.
Gold rose from $260 an ounce to a high of $1900 an ounce during 2000-11, while interest rates fell from historically low levels to even lower levels.
Judging by the interest rate correlation theory, gold prices are significantly higher in two different decades that are opposite to each other.
And the struggle continues when we look at what happened after gold peaked in each case. After gold peaked in the 1980s, interest rates continued to trend upward for several years. And interest rates have continued their long-term decline, and have even recently broken negative integers, six years after gold peaked in 2011.
People talk about gold the same way they talk about stocks and other investments… “Are you bull or bear?” “Gold will explode further if/when…” “Gold fell today…” “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 described as an investment, regardless of the rationale, the misconception leads to unpredictable results. Even the best, most technically correct argument will not lead to logical consequences if the basic premise is wrong.
And, invariably, the expectations associated with gold (however unrealistic they may be) are, like everything else today, increasingly short-lived. “Don’t confuse me with the facts, man. Just tell me how quickly I can double my money.”
People want to own things because they expect/want those things to increase in value. it is reasonable. But the higher prices for stocks that we expect, or have seen in the past, represent an appreciation of the increased quantity and productive contribution of goods and services to the quality of life in general. And it takes time.
Time is of the essence for most of us. And it seems to cover everything to a greater extent than ever before. We don’t take the time to understand the basic fundamentals. Just cut to the chase.
Timing is equally important in understanding gold. In addition to understanding the fundamentals of sleep, we need to know how time affects sleep. More specifically, and to be technically correct, we need to understand what has happened to the US dollar over time (over the past one hundred years).
Many things have been used as money during the five thousand years of recorded history. Only one has stood the test of time – gold. And its role as money was brought about by its practical and convenient use over time.
Gold is the basic wealth. Paper currencies are substitutes for real money. The US dollar has lost 98 percent of its value (purchasing power) over the past century. This decline in value coincides with the existence of the US Federal Reserve Bank (founded 1913) and is a direct result of Federal Reserve policy.
The price of gold in US dollars is a direct reflection of the fall of the US dollar. nothing more. nothing less.
Gold is stable. It is stable. And this is real money. Since the price of gold is in US dollars and since the US dollar is in a constant decline, the price of the US dollar will continue to rise over time.
There are subjective, changing valuations of the US dollar from time to time and these changing valuations are reflected in the ever-fluctuating value of gold in US dollars. But in the end, what really matters is what you can buy with your dollars, which become fewer and fewer over time. What you can buy with an ounce of gold has remained constant or better.
When gold is described as an investment, people buy (‘invest in’) it with the expectation that it will “do something”. But they are likely to be disappointed.
In the late 1990s, there was much speculation about the potential effects on gold of the impending Gulf War. There was some jump in price and concern grew as the target date for ‘action’ approached. Almost simultaneously with the beginning of the bombing by the US military, gold retreated sharply, giving up its previously accumulated price gains and actually went down.
Most observers describe this change as somewhat of a surprise. They attribute this to the prompt and decisive action of our forces and the results achieved. This is a convenient explanation but not necessarily accurate.
What mattered most to gold was the effect of the war on the value of the US dollar. Even going long doesn’t necessarily reduce the relative strength of the US dollar.
The value of gold is not determined by world events, political upheavals or industrial demand. The only thing you need to know in order to understand and appreciate what gold is, is to know and understand what is happening with gold. U.S. Dollar,
