All that glitters: Why I’m not investing in gold

All that glitters: Why I’m not investing in gold

Over the past month, I've read a lot of articles about the virtues of investing in gold. Especially in Facebook forums, there's a lot of talk about how gold makes a great long-term investment. (Fortunately, I haven't seen any comments like this in the GRS community on Facebook.)

Whenever the economy gets turbulent, the goldbugs come out in force. They shout from the hilltops that the world is doomed and that the only safe haven is gold. And I'll admit, their arguments can sound pretty convincing.

When I started this site in 2006, I felt unqualified to comment on gold. I hadn't read much about it, and I didn't feel educated enough to offer an opinion. That's changed.

Now, after fifteen years of reading and writing about money, I know enough about economic history and I know enough about gold as an investment to have what I believe is a (somewhat) educated response to this subject. And that response is this: Gold makes a lousy long-term investment.

Today, let's have a discussion about the pros and cons of investing in gold while using my own opinion as a starting point. (And note that this article contains my opinion. It's backed up by some facts, but it's still my opinion. Don't take everything that follows as gospel.)

Put simply: I'm not a fan of precious metals. I have 0% of my investment dollars in gold and silver, and I expect that to hold true for the foreseeable future. It's my opinion that gold is a bad investment right now. Let me explain my reasoning.

Before we dive into the meat of this article, it's important to understand that I'm not an economist, and I'm not a gold expert. But for the past fifteen years, I've made a career out of personal finance, and gold is one tiny part of that subject. The core of this article was originally published here on 10 May 2011, the last time the goldbugs were out in force. This update contains substantial revisions. Also, please note that many of the comments on this article are from its original publication in 2011.

The Gold Standard

Many folks dislike our current monetary system because it's based on fiat currency. That is, a dollar is worth an arbitrary amount because the government says so. It's not based on anything concrete. Plus, the government can add and remove cash from the money supply at will, which affects the dollar's value.

U.S. dollars — and other world currencies — were once backed by gold. Under the Gold Standard, you could ask a bank to convert your paper money to gold at the legal rate (whatever that might be). In order for the government to print more money, they had to have the gold to back it.

Proponents of the “Gold Standard” argue that since the U.S. abandoned it in 1933, the dollar is more susceptible to inflation. That's true. But the Gold Standard didn't eliminate inflation, and it created other problems besides.

I am not an economist, and I struggle when it comes to economic theory, but my understanding is that much of the run-up to and aftermath of the Great Depression was thought to have been caused by the Gold Standard. Under the Gold Standard, currencies were much more susceptible to speculation and devaluation, which could lead to runs on the banks. That's why the U.S. abandoned it. And it wasn't only the United States that did so. Not a single country in the world uses the Gold Standard anymore. Until recently, most economists and politicians considered it a deserved relic.

Note: Though it's long, this 2004 speech from Ben Bernanke about money, gold, and the Great Depression is interesting, and explains why we're not likely to ever return to a Gold Standard in the U.S.

The Intrinsic Value of Gold

Some proponents of gold like it because they say it has intrinsic value. That is, they say that gold has value in and of itself. (Kevin McElroy does a good job explaining this concept at The Street.)

Goldbugs would have you believe that when diaster strikes — we enter a post-oil economy, we're nuked by terrorists, dinosaurs escape from Isla Nublar, or a new virus wipes out half the world population — that paper money will be worthless and we'll all be trading in gold. Because of its intrinsic value, it'll become a form of currency. I'm not convinced.

Let's say I'm a shopkeeper. I have a minimart and I have a shotgun to defend my stock from looters. If we're in some sort of post-crisis world where dinosaurs roam the earth, I doubt I'll want your gold. It'll be just as worthless (or as valuable) as paper money. Why? Because in reality, gold too is fundamentally a fiat currency. That is, people have assigned it an arbitrary value. That value vanishes in a crisis, just as the value of paper money does.

If I'm a shop owner in this situation — or I'm your neighbor with a vegetable garden — I'm going to be want to be paid with something real, something like a carton of eggs or some shells for my shotgun.

In other words, I don't think much of gold's intrinsic value. To me, assigning value to gold is just as arbitrary as assigning value to anything else. If we're in a real crisis, I'm not convinced that gold's going to save the day. This is just one more reason I'm not investing in gold. (Again, this is my opinion. You may disagree.)

Tip: For a more coherent and educated take on this subject, read this essay on why gold does not have intrinsic value.

My first two objections to owning gold are based purely on theory. Nobody knows for sure what would happen if we returned to the Gold Standard. If dinosaurs roamed the earth, we'd have more important things to worry about than the form of our currency. But I have other, more concrete objections to investing in gold right now.

Investing in Gold During a Bubble

As I write this, gold is hovering at about $1700 per ounce, which is just off its recent peak of $1756.70 two weeks ago. But that's not only its recent high; that's also nearing all-time highs for the stuff. (As near as I can calculate, gold's inflation-adjusted high was about $2250 per ounce back in January 1980.)

Here's a chart (generated at Macrotrends) that shows historical gold prices:

Historical gold prices, raw data

And here's the same info, but with inflation-adjusted prices:

Historical gold prices, inflation adjusted

Modern gold prices bottomed out in 1999. Prices stood at $262 per ounce in April 2001 (an inflation-adjusted $380). Between then and May 2011 — when I first wrote this article — gold enjoyed impressive returns of over 20% nearly every year. At that time, the goldbugs were loudly shouting, “Now is the time to buy.” Peter Schiff, perhaps the loudest goldbug of them all, was predicting prices of $5000 per ounce in the near future.

“I'm skeptical,” I wrote at the time. “I think gold is more likely to see $500 an ounce in the next decade than $5000 an ounce.”

Who was closer to correct? Peter Schiff, a self-proclaimed expert on the subject? Or me, a guy with no special knowledge about gold, but a healthy skepticism of shysters and charlatans?

For a couple of years, gold hovered between $1600 and $1700 per ounce. But then it crashed. By December 2015, gold prices had dropped to $1070 per ounce. Gold bounced between $1200 and $1300 an ounce until about a year ago, at which time it began its climb back to $1700, which is where it sits today.

In hindsight, I think it's clear that we were in a gold bubble in 2011. And I think we're entering one (or already in it) today. We've seen several price bubbles in the U.S. over the past twenty years.

  • First, the boom in tech stocks in the late 1990s.
  • Then, the run-up of housing prices in the mid 2000s.
  • Next, the second stock bubble at the end of the last decade.
  • Finally, the gold bubble that I just described.

Plus, you could argue that during recent years we've been in another stock-market bubble, and I wouldn't necessarily disagree.

During these bubbles, the proponents of each investment made compelling cases for why “this time is different!” More people bought gold and stocks and homes, which drove prices up, which made the investments look more appealing, which meant more people bought, which drove prices up until…

The bubble burst.

The bubble always bursts.

During the bubble, there are plenty of snake-oil salesmen with silvery tongues who will try to convince you that this isn't actually a bubble, that this is where prices are meant to be. Many of these people actually believe what they say. (Though, to be clear, some don't. Some know exactly what they're doing.)

After the bubble, there are a lot of people wondering what happened to their wealth.

Right now, in April 2020, the price of gold is high because the demand for gold is high. Over the past year — and especially, during this coronavirus pandemic — our country's economic policies have created a fear of the future, which means many people are clinging to gold as a sort of insurance. Gold prices are rising. How high will they go?

Peter Schiff is once again enjoying some time in the spotlight, proclaiming that gold will hit $5000 an ounce. He's been singing this tune for almost fifteen years now. I'm not sure why people continue to listen. Long term, I think gold prices are more likely to drop than they are to rise. (But I do think gold will climb — or, at least, stay steady — for a year or two.)

But, hey — I could be wrong. Maybe the gold bubble isn't a bubble. Maybe prices won't come crashing down again. You need to decide that for yourself. Right now, I'm willing to bet on the side of history.

Bonus!

You have no idea how much work goes into a post like this. I do hours of research and write thousands of words before cutting back to the essentials. And with topics involving lots of data, I go down all sorts of rabbit holes while playing with numbers.

For instance, on a whim, I decided to check the effect of the last few Presidential administrations on the price of gold. This is mostly meaningless, but it's still interesting to see.

Gold price change during Presidential terms

The Carter numbers are odd. Nearly all of that 322% increase came during the last few months of his administration. Again, I'm not saying this data has any meaning. I just find it fascinating. If you want to fritter away time by playing with numbers, you may find this page of historical gold prices handy.

(And that's an hour of my time wasted that could have been used to write another article about clipping coupons or budgeting.)

Gold as a Long-Term Investment

For me, the most compelling case against investing in gold can be found in the historical record. Goldbugs like to praise the stuff because it’s a “hedge against inflation”. Gold tends to retain its value as prices rise. That’s true — but long term, that’s all that it does.

There are other things that tend to keep their value during inflation, if that’s what you want. Real estate, for one. And TIPS (Treasury inflation-protected securities, a type of bond). And maybe even savings accounts.

If you want to fight inflation, there are better options. In his book Stocks for the Long Run, Jeremy Siegel crunched the numbers to find the historical performance of several common investments. The results? Between 1926 and 2012:

  • Gold had a real return (meaning: “after-inflation return”) of about 2.1%.
  • Bonds returned about 5.7%, or about 2.6% after inflation.
  • Stocks returned an average of about 9.6% per year, and a real return of about 6.4%.
  • And, according to this academic paper, home prices have appreciated at about 0.9% per year over the past 150 years.

Of course, past returns are no guarantee of future results. Perhaps Schiff is right. Perhaps over the next thirty years, gold will average an annual return of 6.4% and stocks an average return of 2.1%. Nobody knows for sure. But my bet is on the side of history.

Before I leave this section, I want to share a quote from Siegel's Stocks for the Long Run:

Ironically, despite the inflationary basis of a paper money system, well-preserved paper money from the early nineteenth century is worth many times its face value on the collectors' market, far surpassing gold bullion as a long-term investment. An old mattress found containing nineteenth-century paper money is a better find for an antiquarian than an equivalent sum hoarded in gold bars!

There's no real take-away from that, I suppose. It's just funny.

My Father Invested in Gold

You might think that the current gold fever is the first of its kind. Actually, it's not. Gold fever seems to strike every decade or so, whenever there's a run-up in prices. (That's the irony. Nobody's excited about investing in gold when prices are low. They're only excited when prices are high. Need I mention how foolish this is as an investment strategy?)

The first time I remember being exposed to gold fever was when I was a boy.

My father became a goldbug during the economic crisis of the late seventies and early eighties. He was convinced prices were going to soar permanently, so he started investing in gold. The things he said then are just like the things I hear the goldbugs saying today. It's like history repeating itself.

Though he could barely afford to put food on the table, during 1980 Dad found a way to buy ten gold coins at roughly $500 each. (Plus whatever commission he paid.) He loved to show them to us kids: “Look at my pretty pieces of metal.” Dad had no savings or investments, so these coins were his nest egg.

The eggs turned out to be rotten.

As I recall, Dad sold a few of the coins almost immediately because we needed the money to buy food and clothing. No worries. The price of gold had risen, so he made a little profit. But he held the rest of his “pretty pieces of metal” until the mid 1980s, when he decided to start the custom box company. Then he sold the coins for just over $300 an ounce. He lost about a thousand dollars on what he thought was a sure thing. The sure thing turned out to be a bubble.

Further reading

Fore more interesting stories about investing in gold, check out:

If you know of good articles about investing in gold, please share them in the comments.

Should YOU Invest in Gold?

For all of these reasons, I'm not investing in gold. Not right now. Not at these prices. Does that mean you should avoid investing in gold? Not at all. It means you should do your own reading and research and find out what the best decision is for you. Don't just take my word for it, but don't be persuaded by a bunch of ads on radio or TV, either.

Whether you're for or against gold as an investment option, I encourage you to read rational, well-written articles from the other side. Try to figure out where they're coming from. Does the opposition make some good points? After reading another opinion, do you think there might be times that you could see their point of view?

In my case, I'm not completely against investing in gold. In fact, I'm persuaded that it generally makes sense to have some in your investment portfolio as part of a strategy of diversification. In time, I plan to add a little. Eventually. (But not now, not when prices are at record highs.) However, with one exception — see the sidebar below — I can't imagine ever devoting more than five percent of my portfolio to the stuff. (And even that seems high.)

My opinion is that we really are entering another gold bubble, and that the bubble will eventually burst. When it does, I may buy a bit of gold. Until then, I'm happy to watch the roller coaster ride from the outside.

The Permanent Portfolio

One investment strategy that I find appealing uses a lot of gold. This is the permanent portfolio, as developed by Harry Browne. The permanent portfolio calls for a fixed asset allocation:

  • 25% in U.S. stocks, to provide a strong return during times of prosperity
  • 25% in long-term U.S. Treasury bonds, which do well during prosperity and deflation
  • 25% in cash (a money-market fund) to hedge against recession
  • 25% in gold to provide protection during periods of inflation

If I were to choose any other investment plan than the one I have, it'd be this one. I find the arguments compelling, and wouldn't be surprised if five years from now, I've adopted this strategy.

For more on the permanent portfolio — including how to invest in gold — check out Craig Rowland's book, The Permanent Portfolio: Harry Browne's Long-term Investment Strategy. (Caveat: I wrote the foreword to this book but have no financial stake in it.)

Reminder: This is another one of those topics that tends to inspire passionate debate. It's fine to disagree with each other (and with me), but please keep it civil. Sound fair?

More about...Investing, Economics

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LifeAndMyFinances
LifeAndMyFinances
9 years ago

I haven’t considered gold for an investment in over a year. Why would anyone invest in something that’s at it’s value is at an all-time high?

Sure, I think it has a potential to increase in value, but since it’s at it’s peak now, it’s just a foolish investment.

Jacq
Jacq
9 years ago

If you’re that sure of that L&MF, why not invest in a reverse gold stock? I’m down about 30% on the one that I put money into last year. Teaches me to stick to industries that I know. If the analysts that do this stuff for a living 12 hours a day get stuff wrong based on what they “know”, the small individual investor has to leverage whatever they can – and stay out of what they can’t know.

LifeAndMyFinances
LifeAndMyFinances
9 years ago
Reply to  Jacq

I would not invest in reverse gold either. It’s too uncertain – it’s almost like the dot com era. There is enough hype to drive the prices up, but one of these days, the gold craze is going to pop, and leave a lot of people with nothing to show for it.

I’m staying out of this craze all together.

Jerry
Jerry
2 months ago

This is the time to buy gold. The stock market has not yet finished it’s correction downward.

JT McGee
JT McGee
9 years ago

Couldn’t agree more!

The reality is that leverage should afford many people the opportunity to get excessively wealthy in commodities. Look at the Forbes 400–most didn’t make it in this highly levered casino.

BC
BC
9 years ago

“Why would anyone invest in something that’s at it’s value is at an all-time high?”

The price of gold went from ~$1000 to ~$1550 in about a year and a half, making new all time highs all along the way. Would your thought process be the same when it was making new highs at $1000? You’d have missed out on a 50% gain.

Bry
Bry
6 years ago

Looks like timing was just right to short gold in 2011. Now it “might” be bottoming, for awhile, at least.

Jerry
Jerry
2 months ago

Because gold is at an all-time high doesn’t mean it will not go higher. It will go do high, you will be shocked. As for silver, After this pandemic hoax is past us, watch what happens to the economy when hidden technologies are released to be contructed by industry. They will rerquire huge amonts of silver and the price will go sky high from shoratages

Meghan
Meghan
9 years ago

I also read Siegel’s Stocks for the Long Run and decided against investing directly in gold after reading what he had to say.

I am, however, invested in gold and silver (and other metals) indirectly through my investments. I know a few of the ETFs that I have hold shares in mining companies.

mdb
mdb
9 years ago

The US government does not dictate the value of the dollar, it is set by exchange rates, interest rates, economy, and a bunch of other factors. The US dollar floats. The Chinese Yuan is set pegged to the dollar, as are a few other currencies. But ultimately any currency is worth what it will buy, not what the government says. Just ask the people of Zimbabwe.

Michael
Michael
9 years ago
Reply to  mdb

That is where you are wrong. The government has complete control on the value of the dollar. The have the FED which can print as many dollars as they want which will in itself decrease the value of the dollar.

nick
nick
9 years ago
Reply to  Michael

the FED is not a government entity. it is a privately held mega bank.

Katie
Katie
9 years ago
Reply to  nick

Actually, it’s both public and private.

Mike
Mike
9 years ago
Reply to  nick

Its more public than private

Nicole
Nicole
9 years ago

What a fantastic and well-research article! One of the best I’ve read. With any bubble, there’s opportunities for profit-taking but it is risky. Gold is definitely a short-term speculative investment right now, not long-term. Another point to make about gold… NPR morning edition recently had a story about how the gold bubble is making mines that are not usually profitable worth mining… if that keeps up, the supply of new gold is going to bring prices down. I also wonder what Glenn Beck going off the tv is going to do to the price of gold. Might be a good… Read more »

Aaron Kulbe
Aaron Kulbe
9 years ago

Thank you, J.D.

A sane conversation on gold, and why it’s not the panacea.

Does it make sense if I say I always had misgivings about the gold rush, but could never really put my finger on it? The proponents just make it sound too good to be true… and we know how that works.

Your history recap here is very interesting.

Also, you said that people don’t realize how much work goes into a post like this… it’s just a demonstration of the value you provide, amigo!

Beth
Beth
9 years ago
Reply to  Aaron Kulbe

I totally agree with Aaron. Gold didn’t pass my sniff test, and now I’m relieved to see that others feel the same way.

Also, JD, none of your time tunneling through rabbit holes is wasted. You now have expansive knowledge which will undoubtedly come in handy soon. Probably as soon as your next article or even interview.

Nausika
Nausika
7 months ago
Reply to  Beth

In 1940’s when the nazis burned all the farms and crop in my country, and steal all the food, and gold from the peoples hands, and dowries from families daughters, and emptied the Banks from tons of Gold, my Mother told me: Nothing is shining best then a gold loaf of bread when it comes to dark times like war, or bad economy. When it comes to survival, nothing is best then growing your own food. Unless savages come along and take it. Keep old clothes saved, you may need them when it comes to bad times. God did not… Read more »

scott
scott
9 years ago

We have some money in gold coins and perhaps every other week I contemplate selling them. The problem with gold is that there is a pretty high “illiquidity discount” for most people. It just isn’t easy to convert it to cash. In Atlanta, I don’t know of a single locaiton that will buy it back with out taking a pretty significant cut. Additionally I store ours in a lock box, so if the dinosaurs do return, I have to hope that the bank is open!

Lindsay
Lindsay
9 years ago
Reply to  scott

Hi Scott! I’m in Atlanta and sold some gold to a goldsmith. I figure, since they are an end user I will get a good price. It’s worth it to at least call and ask, they will want to know the total weight and karat you want to sell. This place is very straightforward, read their paragraph about the percent value they will pay for various types of gold:
http://www.bthjewelers.com/services/

They’ll pay 93% of the value for pure bullion gold (not sure if that is what gold coins are), or 80% of the value based on karat.

Pamela
Pamela
9 years ago

I think people are attracted to gold because it’s a concrete investment. Most people get excited when gold prices go up and think about hocking that jewelry their grandmother left them and their wedding ring from a defunct marriage.

It’s not too great a leap from that emotional excitement to justifying it as an investment. After all, most human decisions are not rational, they’re emotional.

Interesting post!

KAD
KAD
9 years ago

Good for you, J.D., for not buying into the hype, thinking for yourself, and encouraging everyone else to do the same. Finally, a reasonable contribution to the conversation about gold.

Steve
Steve
9 years ago

I have gold and silver ETF funds and have had the wisdom to but low and sell high. While they make up only 2% of my total investment strategy, it was a way to diversify years ago when stocks were going no where.

Alex
Alex
9 years ago

I agree with your view and the current gold bubble. Fortunately I was able to get in on gold a few years ago and have watched my investment soar sky high However, I currently have been looking at it with my finger on the sell button due to the feeling that the bubble is about to be popped. Once it does however I will probably buy it back up again and continue to hold for the long term.

El
El
9 years ago

Thanks for a really interesting piece. I’ve never understood the complaint against ‘fiat money’. All money is arbitrary, something we just agree has value because that makes it useful to society. NPR had a fascinating story on giant stone money on the Planet Money program; it’s still in use among a small group. Those folks use regular money too, but because the giant stone money still has agreed value, it’s still a useful currency. Looks like this will be one of thoose posts where I check out every one of the links. Good stuff.

raphael
raphael
9 years ago
Reply to  El

The easiest way to understand the objection to fiat money is by being familiar with how most economists define money: http://en.wikipedia.org/wiki/Money

One of the properties of money is that it’s a “store of value”

The ability of governments to print fiat money makes it less able to store value.

Gold, on the other hand, cannot be devalued the same way (I believe the supply increases by 1-2% per year), so it fits the definition of money much better than paper money.

shane
shane
9 years ago

Something’s worth only how much you’re willing to pay for it. There’s no use for gold in a zombiepocalypse. Shotguns shells and samurai swords would be the new gold. I agree with you –gold is no safer than paper money.

Lindsay
Lindsay
9 years ago
Reply to  shane

Shane, I disagree.

Gold jewelry and coins make a *tinkle tinkle* sound when they hit the ground, and can therefore be tossed on the ground in order to distract zombies from your location. Shiny gold can be used like a mirror as either a communication device or a zombie distracting device. And if you happen to have gold bricks, or a bunch of gold melted together by global warming, you can use it as a projectile weapon.

Lindsay
Lindsay
9 years ago
Reply to  shane

Additional: In a pinch, you could make bullets out of gold. Or swords, although it’s inadvisable to make a sword out of a soft metal.

And as an aside – in case of a werewolf apocalypse (or certain types of vampires), won’t you feel stupid that you didn’t invest in silver?

Andy V
Andy V
9 years ago
Reply to  Lindsay

LOL – I like the creativity. You all seem to have good survival instincts!

Lindsay
Lindsay
9 years ago
Reply to  Andy V

Thanks Andy! I just watch way too many zombie movies. 😀

Dave @ Money In The 20s
Dave @ Money In The 20s
9 years ago

I don’t have any money in precious metals and was actually planning to short silver, but it looks like I missed out on that opportunity after last week.

I can’t understand how people want to keep plowing money into gold and silver when they are reaching all-time highs…

Andrea
Andrea
9 years ago

I have several hundred dollars in silver coins -no value beyond their silver(et- one friend suggested that as more people melt down the coins – mine may have value as they become more rare). I do not need to sell them so I just keep them. I inherited them -I suppose at some point I will have to decide what to do with thme

Kate
Kate
9 years ago
Reply to  Andrea

I’d be happy to take them off your hands!
Seriously, if you don’t want them, find a dealer and sell them.

Amanda
Amanda
9 years ago
Reply to  Kate

How do you find a dealer?

Kate
Kate
9 years ago
Reply to  Amanda

Go online, do some research. Ideally, you’ll find someone close to where you live who is also a member of the ANA (American Numismatic Association).
Take your time, don’t take the first offer and do as much homework as possible on the coins you have. Don’t be afraid to get a second opinion.
Remember, too, that coins, like everything else can decrease in value.

Tony A
Tony A
2 months ago
Reply to  Andrea

Not a good idea to sell your inherited silver coins when silver prices are so low and so manipulated. This guy really doesn’t know much about silver and where it’s headed. Even today, at $15, it’s no where near it’s high of $50 per ounce back in 1980. It has ways to go. Think why the nations are buying up gold by the tonnage? The banks also. Why the US just create new law that puts gold and silver as tier one assets. They’re positioning precious metals as currency options once again.

JakeIL7
JakeIL7
9 years ago

JD, one of the best pieces you have ever put together. Well researched, balanced, and a reasoned conclusion based on your work. Good work! On the article itself, I thought Jim Cramer’s views on it from a while ago were interesting (please don’t throw me off the boards! :)). Basically, he said gold is going up simply because that is what is done in times like these. Sadly, the market does a lot more of this programmatic trading than following real logic. However, this IS a bubble (and not just gold but all commodities) and it will die horribly. *sigh*… Read more »

Somebody
Somebody
9 years ago

Well written, but I respectfully disagree. Anybody that chooses an equal amount of stocks to their precious metal investments had better plan on living a LONG time. You talk about bubbles and breaking – the stock market has burst many more times than gold or silver. I’m into silver. It has tripled in the last 2 years and I’m offloading it as we speak, waiting for the settling that will inevitably come. But I’m done with stocks and bonds, period. My retirement plan? 12 jumbo CDs, 1 maturing every month. Yeah, I can live poor interest better than I can… Read more »

ian
ian
9 years ago
Reply to  Somebody
Tage
Tage
9 years ago
Reply to  Somebody

I respectfully disagree.

Over the very long run, the stock market averages between 7-8% after inflation. This number varies depending on the source. How is this a Ponzi scheme, a trick, or a tree full of Monkeys?

Besides, with the proper allocation among stocks, bonds, reits, commodiies, etc. This will smooth out the large dips and gains that are inevitable.

Somebody
Somebody
9 years ago
Reply to  Tage

How is this a Ponzi scheme? And you don’t think the monkey comparison is valid? First, to run a Ponzi scheme, you have to create something people think is valuable so you can sell it to them, regardless if it is worth something or not. This is known as “stock.” What creates value in stock? Nothing. A bunch of people come together and print ink on paper and tell you it has value. And you believe it. Maybe it does, maybe it doesn’t. How do you know? You don’t. So you throw your money into the gambling pit. But you… Read more »

Paden
Paden
9 years ago
Reply to  Somebody

Actually, that isn’t true. When you buy a stock you become part owner in a company. The price rises and falls with the success of the company. You can argue that stocks are based on what people think a company is worth (a valid argument). But you must also consider that in the information age, everyone knows everything at the exact same time. The amount of people who buy a stock and sell a stock are equivalent. There are a fixed number of shares until the company decides to issue more of them, so this boils down to a barter… Read more »

Niek
Niek
9 years ago
Reply to  Somebody

“What creates value in stock? Nothing. A bunch of people come together and print ink on paper and tell you it has value.”

Actually the profit/earnings (P/E) ratio determines the value of a stock. A companies’ stock can go up if it becomes more profitable. Or to keep it in simple “monkey” terms: stock is valuable because it represents people working in a factory, producing something. Creating value.

Gold on the other hand (much like real estate) just “sits” there. There might be a bubble or a crash, but in itself it “creates” zero value.

Kevin
Kevin
9 years ago
Reply to  Somebody

“What creates value in stock?”

The fact that it represents an ownership share in a company, and entitles you to a share of the profits (in good times), a share of the assets (in bad times), and a say in how the company is run.

You seem to be saying that stocks only have value because everyone agrees they do, similar to the fiat currency argument. That’s absurd, and overlooks that companies generate real value, in the form of actual cash profits you can take to the bank.

Lindsay
Lindsay
9 years ago
Reply to  Somebody

I like the way you think. I don’t think it’s a matter of disagree or agree, it’s a matter of how much risk you are comfortable with. You and I are very uncomfortable with ANY risk of our hard-earned dollars. Others are willing to risk it for what is on average a better return on investment. On average being the key words as you point out. I love your “shakedown” analogy.

Rohit
Rohit
9 years ago

Here is another article on moneylife.in that sheds some light on the prices of gold for Indians. I think it also applies to other countries besides India.

Are gold prices infallible?: http://www.moneylife.in/article/are-gold-prices-infallible/8606.html

kalyani
kalyani
9 years ago
Reply to  Rohit

Thanks Rohit for the link to the article on gold prices in India. I was wondering why , in India we’ve never seen a slump in gold prices although JD says it fell in the US.
As an Indian woman, the gold my parents gave me does make me feel more secure and the value has gone up more than 15 times in these 25 years. I believe in buying gold, the real kind, not ETFs.
JD, great article and so well researched. Thank you

Requirement
Requirement
9 years ago

I get tired of how much you think you must clarify that this is only your opinion, and that things could be different in the future, and blah blah blah. It seems like half of this article is that type of padding. Say it once at the beginning or end if you really feel the need, and leave it be so that the real content of the article isn’t continually tripped up.

Niek
Niek
9 years ago
Reply to  Requirement

I understand this sentiment. There is no reason to repeat so many times that you are not 100% sure. I know why you would do it, but once really is enough. 🙂

CEE
CEE
9 years ago
Reply to  Niek

I agree. That was tiresome.

And even though once is enough for many, this is a blog and unless you repeat yourself many times over, the comments will come back accusing you of being a pseudo-expert, or argue your conclusions criticizing your dogmatism, etc. So, I guess I understand where JD is coming from.

J.D. Roth
J.D. Roth
9 years ago
Reply to  Requirement

Yes yes. I agree. And normally I would only mention this once in an article. But I know from experience that topics like this set people on edge, and if I don’t qualify myself again and again, people will accuse me of trying to be an expert, or of making stuff up, or whatever. So, this time (and you’ll note I don’t always do this), I was careful to add the disclaimer several times. Even I found it tiresome. But I also thought it was necessary.

David
David
9 years ago

For a non-economist, I think you sum it up quite nicely. I never understood Gold Standard proponents, although I believe I understand the flaw in their thinking. They dislike non-value currency because the value is arbitrary. Yes, it is true that the international markets determine the value of currencies like the U.S. dollar (Just like gold), but the government has the power to issue more currency whenever they wish (just about), effectively decreasing this value. On the other hand, the govt. can never just “issue more gold.” Therefore, to goldists (may I call you this?), gold’s value is completely determined… Read more »

Mike
Mike
9 years ago
Reply to  David

Gold has been determined by people for thousands of years as a valid form of money. Fiat money has shown throughout history to destroy the country that went to it. Look at the history of the US since we left the gold standard in 1970’s. Oil has gone up dramatically, prices for almost all goods has increased and the value of the dollar has lost almost 90% of its value. The value of a currency needs to based on something and gold over the years has been the thing people value.

CEE
CEE
9 years ago
Reply to  Mike

.
Exactly!!!!

That’s why I’m accumulating 55 gal drums of crude and burying them in my back yard. I try to diversify with some vegetable oil and wd-40 with no more than 5% of my oil portfolio in Olive Oil (virgin, of course!) When everyone’s throwing their gold and silver in the streets, I’ll be the only one driving by just smiling and waving, boys…just smiling and waving.

😉

Mike S
Mike S
9 years ago
Reply to  David

You seem to misunderstand “intrinsic value” concept. Paper doesn’t have value because you sat at a desk for 3 hours in order to get it. Nobody cares how you earned money (well, the police or your spouse might). Where it took you one hour of consulting work to earn $50, it might take the WalMart greeter five hours to earn that much money. Does that make your $50 more valuable than the greeters? No, it does not. The $50 doesn’t have value because of how you worked for it, it has value because it has “Fifty Dollars” printed on it,… Read more »

David
David
9 years ago
Reply to  Mike S

I mean intrinsic in the precise sense, as you would use it in mathematics, meaning “an inherent property”. I am arguing that nothing has intrinsic value (although philosophers argue this point about life), not gold and especially not printed money. In such a world, there’s no perfect currency. Gold is better than paper money, but it is hardly the solution to all our economic problems as some make it out to be. You argue my point exactly. People don’t care how I “made my money”. With each transaction, I am trading some amount of my (perceived) value for the (perceived)… Read more »

Katy
Katy
9 years ago

JD – you da man and that was awesome. Thanks for scouting out the rabbit holes for us.

So now you’ve got me curious – there are so many scams out there when it comes to selling gold. Any thoughts on the best way to “cash in?” I’m wondering if eBay might the fairest way to go…

Lindsay
Lindsay
9 years ago
Reply to  Katy

Katy, I sold mine to a goldsmith. I don’t know if this is the best option, but I assumed that an end-user is going to give me a better price than some “WE BUY GOLD” operation.

victor
victor
9 years ago
Reply to  Katy

Katy,
I am an auctioneer and have coin only auctions 6-7 times a year. I have helped many people sell both gold and silver at prices well above what you get at the “WE BUY GOLD” places and since most auctioneers work on commission the more you make the more we make is always a good bet I will get as much for you as I can. Call an auctioneer that specializes in coins. One estate was offered 16000 for their silver from a dealer and we got 28000 on the auction.

Luke
Luke
9 years ago

A very timely piece J.D. The fact that silver plummeted from $50+/oz to $38/oz in the last few weeks makes me think that there are a lot of large scale investors with vested interests taking profits from bets with precious metals (particularly silver) that will leave naive amateur investors nursing their wounds. No crazy conspiracy theories here, but the meteoric rise in silver prices stinks of manipulation (not by secret cartels, but by greedy investors!) Prior to the recent bull run, changes in value of more than 1-2%/day were the norm. I have no interest in buying until this settles… Read more »

Paden
Paden
9 years ago
Reply to  Luke

Professional investors make a lot of their money off of the foolishness of amateurs. Not off of manipulation, but good business principals. If you are willing to buy something for more than its worth, it is your folly not the guy who sold it to you. He’s selling based on the understanding that people WANT his product. Its not his fault you overvalued it. Buy the market. Look up JD’s index fund articles. While an index fund never beats the average for funds, it doesn’t lose by much either (if at all). It merely performs average. 6-8% return before inflation… Read more »

Luke
Luke
9 years ago
Reply to  Paden

Not sure I agree.

While amateurs are definitely foolish (and greedy) on occasions, it tends to be because they’re following momentum in markets inflated by investors looking to take the money and run at the first sign of a real dip.

Hence my comments about manipulation.

Steve
Steve
9 years ago

The Great Depression was CAUSED by the abandonment of the gold standard. Major countries abandoned the standard during WWI which lead to huge imbalances. How else were they going to fund war? They had to keep the printing presses going to keep the tanks rolling out.

Do yourself a favor and read “America’s Great Depression” by Murray Rothbard. He clearly shows that the Fed’s increase of the money supply in the “roaring 20’s” put the economy on a seemingly endless path to prosperity – that subsequently collapsed and put us in the Great Depression.

Mike
Mike
9 years ago
Reply to  Steve

finally a sane person in these comments

Nicole
Nicole
9 years ago
Reply to  Mike

How funny… I was just thinking that this topic seems to attract a lot of crazies.

Niek
Niek
9 years ago
Reply to  Steve

I’m always surprised to see people who think that they know it better than every single government in the world.

This is a great series on the pros and cons of the Gold Standard. I won’t give away the conclusion, but here is a hint: we shouldn’t go back 100 years. 🙂

http://www.npr.org/templates/archives/archive.php?thingId=133252308

Mike
Mike
9 years ago
Reply to  Niek

You should really think why governments would want to remove the gold standard. As soon as the get rid of this barrier they can print money to their hearts desires to pay for things that wouldn’t be possible on a gold standard. Hence the huge debt crisis almost all countries are facing right now. On the gold standard, governments where restrained on what the could spend but as soon as the restriction was gone they started printing money like it was their job. Notice how the dollar has lost 95% of its values since we left the gold standard. This… Read more »

Niek
Niek
9 years ago
Reply to  Mike

The facts I’ve read suggest the opposite of what you are saying. It seems like most economists agree that the gold standard is rightfully abandoned. I guess we can go back and forth on this, but tell me this: if the Gold Standard is such a great idea, why isn’t there a single democracy in the world on it?

Mike
Mike
9 years ago
Reply to  Niek

That is easy to answer. Its because leaving the gold standard allows government to spend on things that they wouldn’t otherwise be able to afford. They wouldn’t be able to start wars all the time or afford all the welfare programs that all the countries have. I’ll ask you a thing, what has happened to all the nations/countries that had a fiat system in history? Rome, Greek, Egyptians to just name a few.

Eileen
Eileen
9 years ago

Your time and diligence are never wasted, JD. That’s what makes GRS better than the rest. Although this article debuts today, it lasts forever, so every time you have occasion to refer someone to it later, that’s a return on the investment of time you put in. And every time one of us refers to it, all the better. Keep up the good work.

No Debt MBA
No Debt MBA
9 years ago

Very interesting. I tend to feel that when you’re investing in gold you’re investing in the market’s perception of gold as a safe hedge against inflation since gold has minimal inherent value as an investment. There are industrial and jewelery applications for it but why aren’t you investing in companies around those industries or mining if you want to capture their gains or losses? Gold is too volatile and doesn’t produce income or products to be a good investment for my taste.

Derrick
Derrick
9 years ago

William Bernstein (the excellent author of The Intelligent Asset Allocator, The Four Pillars of Investing, etc.) had a good post on the Permanent Portfolio. I suggest you check it out: http://www.efficientfrontier.com/ef/0adhoc/harry.htm

Julia
Julia
9 years ago

Great article! Thanks for explaining it all so clearly — around here there are constant radio commercials for gold-selling services, and they make me cringe with the extreme scare tactics they use.

As for the “Carter bubble,” given that you say most of the rise came toward the end of his presidency, I wonder how much the Iran hostage crisis played a role.

Steve Bonds
Steve Bonds
9 years ago
Reply to  Julia

The cockeyed.com story on “Cash4gold” is a fun read. It’ll reinforce your opinion of those radio commercials.

Kate
Kate
9 years ago

My husband and I were just talking about this last night.
I’m a coin collector (in a small way) but have never been a gold bug. There are a few gold coins I would like to have, but it’s the coin rather than the gold that I want.
I’ve been predicting a silver bubble which seems to have happened last week; I think silver will stabilize now, but that’s just my opinion.
The best way to buy metals is in mining stock.

Michael
Michael
9 years ago
Reply to  Kate

We’re kind of accidental coin collectors too. My dad bought my son a 1oz gold coin when he was born. Since that was 3 years ago, it has appreciated considerably and I’m sitting here wondering if I should sell it to get the most return for my kid.

In the end though, I think the coin is neater than the money, and it’ll probably be one of those things he keeps forever. At least until he runs into an emergency and has to sell it at rock bottom prices. :-/

Don
Don
9 years ago

Buying gold is not an investment, it’s insurance. If you think of it as buying insurance, then the argument points you consider change. For one, it might not matter that it doesn’t provide a real (after-inflation) return. In fact insurance costs money. Now, when you’re buying insurance you have to ask yourself if you are getting good insurance for your money. Everything you wrote in this post suggests that gold is too expensive for the level of insurance you’re getting. TIPs would seem to provide more cost-effective insurance, even better because they simultaneously insure against inflation and deflation. The one… Read more »

Brenton
Brenton
9 years ago
Reply to  Don

Nonsense. Gold isnt insurance at all. In fact its nothing like insurance. If you are truly worried about your own currency collapsing you could just as easily use the forex or even just invest in a foreign stock exchange.

Gold is a commodity, thus its real value will never go up. Basically, a basket of food will cost roughly the same amount of gold no matter what happens to your currency(assuming there isnt a catastrophic food shortage or something).

mlb
mlb
9 years ago
Reply to  Brenton

Is that really true? From JD’s chart in the article, gold is up 76% since Obama took office. I know there has been inflation but I don’t think McDonald’s prices are up 76% in that time… seems to me you could buy more food with an ounce of gold now that you could have in 2009. Maybe there is a long-term correlation but gold is clearly subject to bubbles just like everything else.

Brenton
Brenton
9 years ago
Reply to  mlb

Well, there is obviously going to be short-term spikes, but its still a commodity. People became deathly afraid of inflation, and had a surplus of investment money to use(since they unwisely sold their stocks low). So they bought gold. A barrage of infomercials probably helped as well. However, if you think that gold will increase in value above and beyond inflation for a long term, like 25 years, then you’re nuts. What are you basing that off of? Is gold going to become more rare? Will it be used more in manufacturing? What information leads you to believe gold will… Read more »

Paden
Paden
9 years ago
Reply to  Don

Gold is insurance only if you can time the market. Unfortunately, that is impractical (if not impossible). Its not insurance when you are betting short term. Its called portfolio tilting.

Insurance is splitting your portfolio 50/50 bonds/stocks. Stocks are good in times of prosperity (i.e. when interest rates are high) and bonds are good when times are tough (when interest rates are low).

When you use it as a hedge, possible. But what if there is a sell off on gold and the economy doesn’t improve. Where is the hedge?

Aliotsy
Aliotsy
9 years ago

Thank you for the time and effort you devoted to researching and writing this post, J.D. You’ve put forward a strong case against investing in gold, and I also appreciated that you mentioned the Permanent Portfolio as a reasonable strategy for including gold in one’s investments. I also appreciated that you included a mention of Crawling Road, whose piece on gold ownership represents a reasoned, rational approach that is neither hysterically enamored with gold and nor vehemently opposed to it. I do have one point to add regarding owing gold in a crisis. People on both sides of the issue… Read more »

Shaun Somers
Shaun Somers
9 years ago

Excellent article. I also don’t much like gold as an investment, for most of the reasons you cite above. The gold standard is very workable however. No governments currently are on one now as you mention. But the gold standard is disliked by governments NOT because it can cause depressions or whatever, but because it limits that governments ability to debase it’s own currency. If a government can’t “print money” to pay off it’s own debts, then its borrowing capacity is becomes much more limited. Limited borrowing = limited government spending and growth. I encourage all readers to take a… Read more »

Nicole
Nicole
9 years ago
Reply to  Shaun Somers

This comment is not endorsed by standard mainstream economists. As JD rightly pointed out in his article, the gold standard would be disastrous in today’s economy, and did indeed make the Great Depression greater than it needed to be. There are a couple of excellent books, one by Eichengreen and one by Temin, that discuss the problems that the Gold Standard caused for the Great Depression.

David
David
9 years ago
Reply to  Nicole

It is, however, endorsed by many an armchair economist. Who, by the way, cannot backup their claims with effective arguments nor historical facts.

Although I put little faith in professional economists. I read a great comment once on some website, I’ll paraphrase:

“I remember when I was in college. All the smartest students went into the sciences. All the average students became doctors. Everyone else, they went into economics.”

Mike
Mike
9 years ago
Reply to  Nicole

Yet those standard economist never saw the dot.com bubble or the real estate bubble. Funny how the Austrian economist saw both coming and their economic thought actually explains all the booms and bust in the history of the US. But hey, lets not listen to the people who got it right. Keynesian economics has been wrong and will continue to run the US into the ground.

Nicole
Nicole
9 years ago
Reply to  Mike

That’s silly. Everybody (all the professors and students in my top PhD program) knew that the dot com bubble was a bubble and that the real estate market was going to collapse (again, its unsustainability was a common point of discussion). (Though I don’t think anybody realized quite how much fraud there was within the real estate market. We knew it was going to be bad, but not quite this bad… we’d envisioned more of a 1980s S&L bad.) Those are both in standard economic theory too. When was the only question, and economic theory can’t predict that, because it… Read more »

Michael
Michael
9 years ago
Reply to  Mike

@nicole Did they see it coming in 2002-2006 or did they only see it coming in 2007/08. Are you taught Keynesian or Austrian Economics in your PhD program?

David
David
9 years ago
Reply to  Mike

@nicole,

Yeah, I think business and finance would be more appropriate in that quote.

Nicole
Nicole
9 years ago
Reply to  Mike

Nobody teaches Austrian economics at a top 10 program. That would be like teaching Marxian theory at a top school. Only as a curiosity. (Well, except that one guy that everybody secretly calls a sociologist behind his back.) Also, Keynesian economics was out of vogue when I started graduate school… I can’t tell you whether I had it or not because that would tell you which top school I went to for graduate school since only certain top macro-economists teach it in graduate school. Keynesian economics has made a come-back recently (after the crash) precisely because its predictions and suggestions… Read more »

Lindsay
Lindsay
9 years ago
Reply to  Mike

@Michael

“Did they see it coming in 2002-2006 or did they only see it coming in 2007/08”

Paul Krugman saw it coming as early as August 29, 2005, in this article “Greenspan and the Bubble” where he states, “There are signs that the housing market either has peaked already or soon will.”

source: http://www.nytimes.com/2005/08/29/opinion/29krugman.html

Mike
Mike
9 years ago
Reply to  Mike

@Lindsey haha funny because the person i was talking about talked about it as early as 2002 (Peter Schiff). http://www.youtube.com/watch?v=A0Uk3hKnQQ8 Also bring Krugman into the mix is funny considering it was his ideas (stimulus and lowering interest rates after the dot.com bubble — Keynesian) that was reason we even had the real estate bubble. Its kinda funny that people still thing even Mr. Keynes himself said that his theory didn’t work unless there was a war. http://www.youtube.com/watch?v=Q1B3CXaudCo http://www.lewrockwell.com/woods/woods116.html @Nicole — Keynsian theory doesn’t explain the actual cause of any the problems in the last decade. In fact Keynesian theory is… Read more »

Shaun Somers
Shaun Somers
9 years ago
Reply to  Nicole

I’m just trying to recommend rational, well written arguments from the “other side”, as JD recommends in the post. As a follow up poster suggests, I am indeed merely an “armchair economist”! I think I could provide both rational arguments and historical examples to back up my points, but this isn’t likely a great forum to do so in. Professional, mainstream economists like Bernanke have devalued your US dollar by over 95% in the past century plus. A return to a gold standard would indeed be pretty disastrous for the economy today – the equivalent to a massive hangover following… Read more »

Michael
Michael
9 years ago
Reply to  Nicole

Also on saying the gold standard prolong the depression. Read Murray Rothbards book on the great depression. Its funny how the gold standard before the great depression never caused anything close to what happened during the 1930’s. The only real change between recessions before the great depression is that govt got involved in the market by way of the New Deal Programs. Look at 1921 recession had an even greater decline than 1939 but yet rebounded in one year. How did this happen, the govt stayed out of the way and let the market readjust itself. I am assuming your… Read more »

Mike
Mike
9 years ago
Reply to  Nicole

Read Murray Rothbard book on the Great Depression. The gold standard didn’t cause or prolong the depression. If the gold standard was the cause of it then why didn’t we have a great depression in the previous hundred years? Inflating the money supply is the cause for all booms and bust. And govt spending(stimulus) like the new deal only prolongs the problem. If you let the market adjust itself unimpeded then you will get a quicker recovery like in 1921 which had an even greater drop but recovered in about a year.

J.R.C.
J.R.C.
9 years ago

Another important point about ‘investing’ in gold is that gold does not produce money! If you own a stock, there are two ways to earn money: it can provide dividends, or the stock price can increase and you can sell it. With gold, you only make money if the price goes up. The reason some (very smart) people do invest in gold is because it can be a healthy addition to your *Asset Allocation*. The idea behind asset allocation is that you want different classes of assets that are not correlated to each other. The most basic classic idea of… Read more »

Paden
Paden
9 years ago
Reply to  J.R.C.

Great post. Really well said.

I would mention though that many websites and investment books will refer to this 1-5% as “tilting” a portfolio. This is the “fun money” of your account to keep you excited in investing, not the bread and butter of your retirement.

Edgar
Edgar
9 years ago

I’ve always thought of gold as something that will always have value, especially when dinosaurs roam the streets. Mainly because that’s what everyone else always says. I absolutely agree that gold is fiat money just as much as any other currency and, but has never thought of it before. Your article fits perfectly with an article I read last week. I may have found the link here at GRS, I don’t remember. http://rhetoricaldevice.com/articles/BriefHistoryOfMoney1.html It shows how the first silvercoins where chosen BECAUSE they had no intrinsic value (you couldn’t eat them). When it comes to using gold as a hedge… Read more »

Sam
Sam
9 years ago

Buy low, sell high is an investing rule. As a result, I’ve been selling my gold (not investment gold, but scrap gold) for big bucks the last year or so.

JD, I enjoyed this post, thanks.

Tyler Karaszewski
Tyler Karaszewski
9 years ago

I predict the value of gold is going to drop dramatically on May 22nd, after all the crazy people who advocate for it disappear in the rapture.

Nicole
Nicole
9 years ago

ROFL

Amanda
Amanda
9 years ago
Reply to  Nicole

+1

Procrastamom
Procrastamom
9 years ago

Ha! When they’re gone, we can all swoop in and take their stuff. I know my in-laws, who believe in the rapture, are big on buying gold (because their church told them to), so I’m gonna have me some pretty things on May 23rd!

Jen
Jen
9 years ago

Thanks for doing all the hard work and research for me! I’ve had very similar feelings about gold for a while now (it’s a bubble, and bubbles always burst), but didn’t have very firm facts or information to back up my gut feeling. Now I feel more informed, so I can go with my gut with a little more confidence 🙂

Matt (with The Online Budget)
Matt (with The Online Budget)
9 years ago

A great, informative article, injected with a nice touch of humor! Thanks. I’ve been kicking around “shorting” gold ETFs for a few months now, but I really don’t have the resources (yet) for doing so. So, for any goldbugs out there: Please buy my newsletter – which has loads of information on investing in Pez dispensers, Beanie Babies, Pets.com stock, and yes – Dutch tulips!

Bryce
Bryce
9 years ago

“If I’m a shop owner in this situation – or I’m your neighbor with a vegetable garden – I’m going to be want to be paid with something real, something like a carton of eggs or some shells for my shotgun.”

The movie The Book of Eli with Denzel Washington presents a post-apocalyptic dystopian society where people barter and trade valuable goods as money (clothing, lighters, guns, ammo, food, etc.). I agree that this is a more likely scenario than trading gold.

Mike
Mike
9 years ago
Reply to  Bryce

that is true for awhile but the barter system is very inefficient. Eventually as the society develops again some sort of money will developed because it makes making trading easier. That money may be based in gold, silver, or anything that people find valuable

partgypsy
partgypsy
9 years ago
Reply to  Bryce

My dad was a child in Greece during and after WWII, where there was a civil war, unstability and food shortages. He lived on a farm and was poor but they had the farm and they traded with the people around them to get other things they needed. On the other hand people from the city came into the country, begging and offering money, watches, family heirlooms for a loaf of bread and were turned away. Yes it may be “short term”, but short term still may be years and you can’t eat a gold watch when you are starving.

Mike
Mike
9 years ago

I take exception to this part of your blog post “I am not an economist, and I struggle when it comes to economic theory, but my understanding is that much of the run-up to and aftermath of the Great Depression was thought to have been caused by the Gold Standard. Under the Gold Standard, currencies were much more susceptible to speculation and devaluation, which could lead to runs on the banks. That’s why the U.S. abandoned it. And it wasn’t only the United States that did so. Not a single country in the world uses the Gold Standard anymore. Until… Read more »

Shawn G
Shawn G
9 years ago

Like J.D. said, gold has no real value. If the world as we know it ended today, gold would mean nothing. If you have all this gold, and I have food, what makes you think I’m going to trade food for gold?

As an investment, I’m not opposed to gold, but I have not invested in any of it. Maybe if the value drops again I would purchase some, but not right now.

raphael
raphael
9 years ago
Reply to  Shawn G

Gold is money; i.e. it has all the properties of money: http://en.wikipedia.org/wiki/Money, but most important to your point is that it’s a medium of exchange and a store of value. Unless we’re really talking about an apocalyptic scenario where very few people are left and it becomes very hard to grow food, your stock pile of food will either perish, or be harder to trade for other stuff than my stock pile of gold.

Niek
Niek
9 years ago
Reply to  raphael

That’s exactly the point: it has all the properties of money. Which makes it (like money) useless in a “end of the world situation” where we will all start bartering for things that feed and protect our families.

Shawn G
Shawn G
9 years ago
Reply to  raphael

I realize talking about an ‘end of the world situation’ is out there, but when you talk about the value of gold you have to. Gold is simply a rock that we have assigned value to. Sure it’s a good conductor of electricity, and can be used for repairing teeth, but beyond that what use does gold have? If the world ended today and I wanted to trade you a petosky stone for food would you? No you wouldn’t. The same is true for gold. It’s simply a rock that we have assigned value to. Just like the dollar is… Read more »

GS
GS
9 years ago

Don’s comment (#28) is spot on! Gold is not a hedge against a catastrophe or even inflation but against the collapse of a currency. It is NOT an investment in order to make x % in y years. It is seen as an insurance in order to preserve at least a part of your wealth should the Dollar or your national currency collapse. And it almost certainly will do that job better than stocks or real estate. JD somehow missed to even mention that motivation. Btw, just one word about that “you can’t eat gold” notion. Sure, but the same… Read more »

Adam P
Adam P
9 years ago
Reply to  GS

I don’t understand why gold preserves your wealth in the event of currency fluctuations/collapse/hyperinflation better than stocks or real estate? Wouldn’t those things just go up in price along with everything else? If not, would they not be a bargain to buy?! How is gold different than those things? Buying gold because you expect armageddon akin to 28 Days Later where you need shotguns and huge stockpiles of food seems ridiculous to me. If the world comes to this, the gold you own in ETFs or whatever will be worthless to you and if you’ve stockpiled gold bars in your… Read more »

Mike
Mike
9 years ago
Reply to  Adam P

gold in terms of dollars will increase but gold against any other commodity will stay the same or gold will be able to buy more than was previously possible. Take this for example, in terms of dollars, oil has increase dramtically in the last year but oil in terms of gold has actually gone down in value in the last year.

GS
GS
9 years ago
Reply to  Adam P

I agree, let’s not discuss end of the world theories. I only wrote about them because JD suggested they’d be important for gold bugs. When thinking about a currency collapse we must keep mind that it doesn’t come out of nowhere. In all likelihood we would experience a massive economic slump before and the currency reform would only be the mean to end it. This is where the problem with stocks lies. There will be a lot of bankruptcies. If you happen to own shares in bankrupt companies, you’ve got a problem. Preparing for such a crisis would thus mean… Read more »

Brakhage
Brakhage
9 years ago

Great piece. Re massive price increase under Carter:

http://en.wikipedia.org/wiki/1979_energy_crisis

Kevin M
Kevin M
9 years ago

I’ve never understood the reasoning behind hoarding gold in case of a depression or even more serious financial calamity than what we’ve experienced recently. Like you said, I’m pretty sure any type of food, shelter or clothing would be more valuable than a shiny piece of metal if the SHTF. I’m no economist either, so why do people automatically assume since the dollar is being “devalued” that means gold should increase in value? Gold (other than it’s true uses as jewelry, in electronics, etc) seems like a giant pump and dump scheme to me – if enough people fall for… Read more »

J.R.C.
J.R.C.
9 years ago
Reply to  Kevin M

Don’t imagine total world devastation where everyone is looting for food in a radioactive wasteland. Instead imagine an economic disaster localized in one country or in one region of the world. Imagine you are a citizen of a small up and coming country. You are a prominent business person and have the equivalent of $10 million USD in stocks/bonds/cash in your country’s currency, and the equivalent of $1 Million USD in gold. Now imagine tragedy strikes your country, and there’s total economic collapse, and your nation experiences hyper inflation, or extreme devaluation of the currency. Your stocks/bonds cash formerly worth… Read more »

Kevin M
Kevin M
9 years ago
Reply to  J.R.C.

If I’m a citizen of “Unstable Country X”, I’m pretty sure I wouldn’t hold all my wealth in local currency. Diversification would take care of 95% of the problem I’m guessing. Until the dollar stops being the default world currency, I’m not going to get too worried.

J.R.C.
J.R.C.
9 years ago
Reply to  Kevin M

You are exactly right! The problem is that if you’re in the US (I am). Many people’s portfolios are all in US funds. International Diversification is pretty important and highly recommended. However it’s important to remember that is only a diversifying of total markets, and markets may or may not be correlated (depending on the hypothetical disaster). So instead of just hedging against market risk through geographical diversification, you can use gold as a different asset class to help achieve diversification. You are not in any way wrong! i’m just pointing out where gold can be usefull. (but usually only… Read more »

Ross
Ross
9 years ago

Don’t neglect the commissions paid on the purchase of solid gold. If you read the fine print on the brochures the various companies will send you, in the “fees” section you will see where they may charge you up to 30% on *each side* of the transaction!

There’s a reason you continue to hear commercials for gold – it’s very profitable!

raphael
raphael
9 years ago
Reply to  Ross

If you’re referring to GoldLine (there are plenty of others, I’m sure), the markups they charge border on fraud. They give legitimate dealers like Europac Metals (Schiff’s company), GoldMoney, and e-gold a bad name. You shouldn’t have to pay more than a ~5% markup.

Edmund X White
Edmund X White
9 years ago

Thanks for including the permanent portfolio at the bottom. This has been my choice for several years now because like you I found the arguments and data compelling. It is a good reminder that this approach to gold is different than the bubble approach the rest of the article (and it sounds like your Dad) talks about. Thanks for the time and effort it took to put this together.

Joshua Hertz
Joshua Hertz
9 years ago

I couldn’t quite articulate to people why I was so skeptical about investing in gold and this sums it up beautifully. I can’t think of any value gold would give me personally, or value it would give anyone other than being a commodity with fluctuating demand and price. I don’t see the price of gold plated cables spiking so I can’t see the value in gold.

Katelyn
Katelyn
9 years ago

A few notes about precious metals: First of all, silver, gold, platinum, and palladium (the four precious metals that are primarily traded) ALL HAVE VALUE! Ever heard of the catalytic converter? How about the printed circuit board? Solar Panels? Fuel Cells? There are hundreds of other widely used commercial applications for these metals. Yes, we are mining more precious metals everyday. But we are also using more precious metals in everyday manufacturing than ever before. Just because you invest in precious metals does not mean you are advocating for a “gold standard”. In fact, JD I’m surprised you made that… Read more »

C. Jensen
C. Jensen
9 years ago
Reply to  Katelyn

Gold doesn’t have many industrial uses though. I believe that less than 20% of gold mined is used for industry. The rest is jewelry, coins, etc. The other metals you mention have much more use in industry. For example, it is platinum that is used in catalytic converters due to its ability to withstand high temperatures.

retirebyforty
retirebyforty
9 years ago

I don’t have any investment in gold either. I think it’s bad timing right now. I will probably buy some gold when the price get a much cheaper. I knew some people who were in Vietnam when the communist took over. The gold were the only thing they could take with them. It’s a hedge against all out disaster. I think you can always move to a better situation so gold could be exchange for currency at other places.

Wille
Wille
9 years ago

I’m not going to argue whether gold is a good investment or not at this current time, the fact is: I don’t know. It is certainly less good of an investment today at $1500 than it was some years ago at $400. ..but, many of your arguments are deeply flawed: That equities have made good returns since 1926 is pointless for a number of reasons: Firstly, most people do not have 85 years or an arbitrarily long period of time to save up for retirement. They have about 30-35 years. If you pick a few time intervals for equities that… Read more »

SS
SS
9 years ago

Warren Buffett had this thoughtful thing to say about gold:

“You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all – not some – all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?”

Justin
Justin
9 years ago

I like the anecdote about the value of antique paper money due to its collect-ability vs. the equivalent amount of gold. One of life’s little ironies I suppose.

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