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truthisntstupid (92.68)

Gold Is Money. Gold Is Not Money. Who's Right? Why Do You Care? HERE'S What You Should Want To Know.

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July 18, 2011 – Comments (14)

So much argument about whether gold is or is not money.  Heated debate over a definition.  I have argued that it is not. 

I shouldn't have.  There was no sense in it.  The real question is whether it holds up to the other argument always made for it.

Will it protect you from inflation?  Is this time really different?  Do you believe we've never been here before?  Are you old enough to remember the last time everyone was going on about runaway government printing presses, unemployment, the national debt, the deficit, and on and on ad infinitum?

Well.  I am.

It was in 1980.  Yes.  We have been here before.  

Feb 9, 2011, just a few months ago, I made up my mind to prove my case.  Look, I'm not going to change anyone's mind about whether gold is or is not money.

 I realize now that arguing about the definition of a term was never even important to me. 

WHO CARES?

Don't allow this noise to obscure what's really important. 

Whether or not you accept defining it as money, what you really need to do is to view the facts objectively and decide for yourself whether or not you want to invest in it.

Late at night on Feb 9, I spent hours researching facts and presenting them in a blog that shows, once and for all, exactly how gold has performed as a hedge against inflation for the majority of the last 40 years. What you do with that information is up to you.

Many of you may have missed it.  There were only a handful of commenters.  

I am going to present you with a few facts from the original blog regarding gold's behavior in the past, and if you want to read the original blog, I'll provide a link.  The whole comment section was largely a debate between David from Qatar and myself.

He was right insofar as I shouldn't have been arguing that gold wasn't money.  If you wish to call it money I really just don't care.

My point was that its valuation as measured against a basket of goods is at or nearing a historical high. The same arguments being made justifying it now were being made in the past at similar valuations as measured against a basket of goods. 

I presented a chart showing the average price of gold each year since 1971 in today's dollars.  I will not reproduce it here.  You can go to the original blog to look at it.  The reasoning is obvious.  Tracking gold's price movements tells you nothing when the value of the dollars those price movements are measured in is always moving.

So using an inflation calculator, I painstakingly converted the average price for each year since 1971 into today's dollars.

Here is some of what I found.

The time span I examined included 33 5-year periods, 28 10-year periods, 23 15-year periods, and 18 20-year periods.

 

5-year periods (33 in all)

There were 16 5-year periods in which gold gained enough to beat inflation.

There were 17 5-year periods in which gold either didnt gain in value or didn't gain enough in value to beat inflation.

11 of those 5-year periods gold went down in price and lost money, period.

 

10-year periods (28 in all) (I miscounted them as 27 in the original blog, correcting myself in the comment section)

In 18 of those 10-year periods, gold either failed to gain in value or failed to gain enough in value to beat inflation.

In 11 of those 10-year periods, gold went down in price and lost money - period.

 

15-year periods (23 in all)

There were 7 15-year periods in which gold gained enough to beat inflation.

There were 16 15-year periods in which gold either didn't gain in value or didn't gain enough to beat inflation.

9 of those 15-year periods gold declined in price and lost money...period.

 

20-year periods (18 in all)

There were 5 20-year periods in which gold gained enough to beat inflation.

There were 13 20-year periods in which gold either failed to gain in value or didn't gain enough in value to beat inflation.

There were 5 20-year periods in which gold declined in price and lost money - period.

 

By the way, as is shown in the 4th column of the chart I posted in the other blog, showing the declining value of the dollar from 1971 on...inflation never let up.  Whether gold rose in value, stayed flat (it did that a lot) or fell in value (sometimes a lot) inflation was steadily at work, year in and year out.

This work encompassed the years from 1971-2008.  

I don't care if you want to call gold money. As I said, I never should have been drawn into that argument.  What I really care about is presenting pure, incontrovertible facts to help you decide whether you want to put your money in it at these valuations.

Here's the link to the original blog, titled, "Historical Gold Prices And Inflation."

 

http://caps.fool.com/blogs/historical-gold-prices-and/536575

14 Comments – Post Your Own

#1) On July 19, 2011 at 2:33 AM, awallejr (79.68) wrote:

Yeah but in the end it is just an asset like Bernanke said.  Calling it an asset isn't a bad thing.  Some assets are good some aren't.  Trying to make gold a universal currency simply would make those Countries with the gold mines the power plays.  I know if I was leading one of those countries I'd nationalize them in a flash.

It's an asset.  End of story.  That doesn't mean it is a bad investment.

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#2) On July 19, 2011 at 2:45 AM, KurtEng (31.05) wrote:

Interesting. I am also bearish on gold, but we'll see if this is the time that's different. I really can't criticize anyone for wanting to hold gold now with a default seeming somewhat likely.

I think it should also be noted that paper, copper, zinc, nickel, and that cheap-looking stuff covering the new $1 coins is also money because money is made out of them and they have some non-zero value.

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#3) On July 19, 2011 at 9:14 AM, totallyoblivious (30.75) wrote:

I'm quite bullish on gold for as long as debt in the U.S. and Europe remain a major issue.  Once those start showing signs of being resolved, though, I'd get out before the bottom drops out.

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#4) On July 19, 2011 at 9:47 AM, wolfman225 (63.83) wrote:

I'm curious to hear your views of those who aren't moving into gold as an investment per se, but rather as a safe haven, or insurance, against future monetary instability.  The way the argument usually goes, if you buy and hold physical gold you avoid most exposure to the possibility posited by some that the USD is in real danger of being dropped as the world's reserve currency.  While some even argue that government is on the verge of nationalizing private retirement accounts such as IRA's, 401k's, ROTH's, etc, or any other tax-advantaged accounts.

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#5) On July 19, 2011 at 4:18 PM, Teacherman1 (43.04) wrote:

Hey Truth, aren't you supposed to be busy this time of year. Where did you find time to blog? (:.

My gold is money, because I started buying it before we (the citizens of the United States) were allowed to own bullion.

So I bought coins.

It is also a hedge against inflation, because I bought it so cheap.

I personally wouldn't buy more, because it would only dilute my appreciation.

Mostly I don't think about it. It just sits in the safe deposit box and waits until there is an emergency, or my wife and I pass and the kids get their hands on it. At which time, it will probably be converted into "play things".

Have a good day, and don't work too hard.

Hope it's not as hot in your kitchen as it is outside my house.

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#6) On July 19, 2011 at 4:31 PM, truthisntstupid (92.68) wrote:

awallejr

I agree; of course it's an asset.  You make an interesting point about making it a universal currency and creating a new (cartel?) out of the countries that have all the gold mines.  Sort of like OPEC maybe?

KutEng

Anyone reading these blogs can tell I'm not someone who would be buying gold at these levels (actually, not at any level).  As I've written, I've seen this show before.  I think dividend-paying stocks will outshine either gold or cash in years to come.

totallyoblivious

I'm not sold on gold providing any protection from anything save for the select few who manage to get out in time, but if I had more money, I, too, might hold a small amount of gold.  I don't have much money, or make much money, so I'll stick with dividend-paying stocks as my safe haven.

wolfman

They could be right this time.  I just won't stake any of my money on it, because this whole show has been on before.  I doubt this is the last time, either.   If the USD is dropped as the world's reserve currency, well, we still live here...right? 

How high will gold have to go before you decide to exchange some of your gold for "worthless" USD to buy food and pay bills with?  How long would you be able to wait?  Would the USD really lose all its status as a reserve currency?  Or would it just become less dominant?  What if it doesn't happen, or doesn't happen for many years to come, and meanwhile, gold falls to half what it's selling for now?

Thank you all for your comments!

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#7) On July 19, 2011 at 4:37 PM, truthisntstupid (92.68) wrote:

Hi teacherman!  Nice to hear from you!  Outside has nothing on our kitchen, believe it or not. 

I really should have gone to bed instead of staying up to write this last night. But, a person has to have a life, too, even if he got up at 3AM for the last 5 days.

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#8) On July 19, 2011 at 9:29 PM, truthisntstupid (92.68) wrote:

Here's a thought.  Many people who read the posts on this board may be older folks, in their 50s and beyond.  This is extremely bothersome. 

If younger folks sink money into gold only to watch history repeat itself in a most unpleasant way, they have years ahead of them to replace what they will have lost.

In the late 70s and in the 80s, I have to wonder how many older folks succumbed to all the pessimism and all the hype surrounding gold, never to live to see anything but their money cut in half.  This after the idiot Greenspan trashed interest rates and wrecked their retirement plans (their IRAs).

Even simple passbook savings accounts paid an interest rate of 5.25% most of my adult life.  This was gone. Along with any hope of living the way they thought they would in their golden years. 

They did everything they were supposed to.  They saved.  They lived within their means.  This was before investing in the market was as easy as it is now.  They did everything they knew to do - only to have the rug pulled right out from under them.

Older folks, please at least look at the table in the other blog I provided a link to.  Invest in gold if you want to, but know the history!

Don't risk too much!!!

 

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#9) On July 19, 2011 at 9:30 PM, mtf00l (48.04) wrote:

http://en.wikipedia.org/wiki/Money

 

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#10) On July 20, 2011 at 12:05 AM, awallejr (79.68) wrote:

You make an interesting point about making it a universal currency and creating a new (cartel?) out of the countries that have all the gold mines

It really is for that reason more than anything that I don't think it could ever be a currency, the countries with the mines win, regardless of the strength of their underlying economies.  South Africa all of a sudden becomes a world power?

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#11) On July 20, 2011 at 8:14 AM, Onigato (66.84) wrote:

Not everyone reading this blog post is an older person. I'm all of 28, and I find the lack of vitriol on these comments refreshing. Gold *isn't* money, but as an asset, there are few with longer histories of value. Whether that value is a little (okay, a lot) overinflated right now is debatable, but I'm not buying into it in either a market sense or physical, in-a-safe-deposit-box amounts.

 Money backed by a hard asset is probably something that we could use, but we've spent nearly 40 years without a hard asset backed money, and I don't see anything good happening if that is reversed without a lot of care and caution that I don't trust any governmental body to accomplish.

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#12) On July 20, 2011 at 6:18 PM, truthisntstupid (92.68) wrote:

Onigato

Probably most reading this blog aren't older people; I know that.  But hopefully those that are might at least examine the history of gold and its volatile movements in the past then make an informed decision well aware of the risks.  If it takes a plunge and remains down for 10-20 years again, it would be small comfort to them to believe that it would eventually rebound once more - after they're gone from this earth.

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#13) On July 22, 2011 at 11:32 PM, whereaminow (< 20) wrote:

David in Qatar

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#14) On August 11, 2011 at 7:50 PM, dpdoor (33.29) wrote:

Im with you,

And if Armageddon sets in and the banks fail you can always call your stock broker and ask him to cash in your gold ETF and send your money. But the money won't be any good.

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