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 I don't believe there is any investment, outside of a mania, that elicits more emotion, both positive and negative, than gold. People love it or hate it, there isn't much in between. It's because of these strong emotions that there is so many misconceptions about the yellow metal. Emotions tend to cloud normally reasonable minds to the point that they miss either opportunities or dangers.

 Which brings us the current bull market in gold. What does gold hitting all-time record highs mean? To answer that you must brush away the myths and misunderstandings of what gold is and why someone would purchase it.
 I am going to attempt to do that.

Gold is a Bubble?

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 You hear that a lot these days. People, nearly all of whom failed to anticipate gold's rise, say things like this.

 "Pick a number, [Gold] will continue to go up until it stops... It is a bubble. To say otherwise would be naive, that's really what it is."

 Accusations that gold is in a bubble don't make it so. For example, I found this prediction of the gold bubble bursting from December 2005. The price of gold has more than doubled since then. A simple Google search will turn up multiple declarations of correctly predicting the bursting of the gold bubble every time the gold price temporarily corrects.

 So you have to ask yourself, what is a bubble? After two economic bubbles in a decade, people should be able to identify them by now. The most obvious condition of a bubble is that everyone is participating that can participate. Remember how everyone you knew that could afford a home in 2006 was already a homeowner? Sometimes they were flipping houses. It seemed like everyone was talking about rising home prices, and how the price never seemed to go down.
  Now ask yourself, do you know anyone that owns gold bullion? The answer to that probably is "no".

 Gold, a silly artifact to many investors in the 1990s, has become the great "if only" investment: "If only I'd bought it nine years ago, or four years ago, or six months ago."
  But even now there are plenty of people who can't bring themselves to consider gold as an investment.

 Can you honestly say that an investment that "plenty of people can't bring themselves to consider" is some sort of speculative mania? There is no mania here. The general public has sat this one out. Most people don't even know how to buy gold.

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  Some point towards all the cash4gold commercials you see on TV as an indication of a gold bubble. In fact it shows the opposite. If gold was in a mania then the commercials would be gold4cash - they would want to be selling you gold, not buying it from you. The idea of a bubble is to find the bigger fool to sell an overpriced asset to, not to accumulate the asset.

What is gold?

"In truth, the gold standard is already a barbarous relic."
 - John Maynard Keynes

 So why buy gold at all? What is its purpose? It is this question that is the most controversial and causes the most misunderstandings. Here is the simple answer:

 Gold is money.

 This statement always brings out outraged gold-haters. "You can't buy groceries with it," they shout. This point, while seemingly obvious, isn't as correct as they would lend you to believe.
  For starters, I have to ask when is the last time they went to a grocery store? If they did they would notice very few people paying for groceries with paper money. Instead you see them using little pieces of plastic to pay. Are those little pieces of plastic money? No. The credit and debit cards represent money. The actual money is sitting in the bank vaults.
  Are bank vaults brimming with paper money? No. They are filled with mortgage-backed securities, treasury bills, and gold.

  That's right, gold. The largest hoarders of gold in the world are the many central banks. They don't own the gold because it is pretty to look at. The only things they put in their vaults is money.
  Where people get confused is the difference between currency and money. Currency is only one element of what is considered the money supply. If you asked 10 different economists what is money, you would probably get 10 different definitions. That's why every nation has multiple official ways to measure how much money is in the economy.

"If anything had or could have a value equal to gold and silver, it would require no tender law; and if it had not that value it ought not to have such a law; and, therefore, all tender laws are tyrannical and unjust and calculated to support fraud and oppression." - Thomas Paine, 1786

 If you check up on gold in the financial pages you will most likely see it included in commodity prices. It is, after all a metal you mine from the earth like zinc and copper, and is subject to the laws of supply and demand like oil and wheat.
  But that's where the comparisons to other commodities end. Gold has almost no uses as a commodity.

 gold has no intrinsic value as a consumption good or a producer good, it is an example of what I call a fiat (physical) commodity...
 Since gold is a fiat commodity currency, its value will be determined largely by its attractiveness relative to other fiat currencies - the fiat paper currencies issued by central banks.  Gold should not be analysed as one of a set of intrinsically valuable commodities (silver, iron, lead, zinc, platinum, aluminium, titanium etc. etc.) but as part of a set of intrinsically useless and valueless fiat currencies - the US dollar, the yen, the yuan, the euro, sterling, the rupee, the rouble etc. etc.).  It is therefore in times that market participants are nervous about the future value of most other fiat currencies, that gold will be at its most attractive.

The quote above makes several basic mistakes in its attempt to denounce gold. For instance, it confuses what the word "fiat" means. It also calls gold a "6,000 year bubble", which defies common sense in regards to what a mania is. However, the article does correctly identify gold's role in the world and why it is.
  Unlike other commodities that get consumed, almost all the gold ever mined is still in existence. Unlike oil, gold doesn't get used up in production. Unlike copper, gold doesn't rust. Unlike wheat, gold isn't eaten. Gold just sits there retaining its value.

  The only realistic purpose for gold is to be used as money, just like it has been for 6,000 years. It's value being determined by the laws of supply and demand, just like fiat currencies.
  Unlike paper currencies, the supply of gold can only be expanded by about 2% a year. Thus the same amount of gold it took to buy a loaf of bread during Babylonian days is about the same amount of gold is takes to buy a loaf of bread today. The price of gold may vary a great deal depending on the supply of paper money out there, but the supply of gold is constant (with the loan exception of the conquest of the New World in the 16th Century).

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  One other thing I should mention. As for using gold to buy groceries, it turns out that you can do it. With Goldmoney.com you can get a debit card issued to you and use it at the grocery store to buy your weekly groceries just like everyone else. The difference is that instead of debt instruments representing your money, you would have your own gold and silver sitting in a vault.
  I personally don't do this, nor am I incline to for personal reasons, but I thought I should mention it.

So why buy gold?

 Imagine for a moment that there is an asset that has gone up in dollar value every single year for eight straight years, is about to have one of its best years in 2009, and is the best performing asset class of the decade.
 Imagine that this asset has been going up in value in every currency in the world over the last five years.
  Imagine that worldwide demand for it is hitting all-time records while outstripping supply. At the same time worldwide production of it has fallen 10% over the same period.
 Imagine that worldwide government selling of this asset has turned into worldwide government buying of this asset for the first time in over 40 years.
Imagine that all the major commercial producers of this asset are positioning themselves for years of rising prices.

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 If I told you that this asset was widgets, or oil, or even pet rocks, you would probably be rushing out to buy some in order to ride this bull market. That's what everyone did with dot-com stocks and real estate.

 Now imagine that professional investment advisers on Wall Street, who wouldn't hesitate to sell you black-market kidneys and weapons of mass destruction, if it were legal and they could make a profit on it, have universal disdain for this asset.
  Imagine that if you mentioned buying this asset at a neighborhood party someone would be sure to think you are a kook.

 Doesn't it make you wonder what is wrong with this picture? Why would people, who bought houses in the middle of the desert that they never intended to live in, or dot-com stocks from companies without a business plan, frown on any investment that is making money?

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 The common refrain by Wall Street is that gold's only use is as a hedge against inflation. Since inflation expectations are currently low, it doesn't make much sense at the moment to buy gold. They like to point out how gold peaked in 1980 at $850 an ounce, when inflation was high, and has been an incredibly poor investment since then...if you ignore the last decade.
  What Wall Street never does is explain the reasoning for this link between gold and inflation. If you examined the statement you would find it is without foundation.

 Gold isn't an inflation hedge. Gold is a currency hedge. The reason why Wall Street gets this wrong is because they still think of gold as a commodity, not as money.
  Inflation is a common symptom of a weak currency, but it isn't the only symptom, nor is it a required symptom.

 The most important reason why gold prices are at a lifetime high today (gold has already sailed past its previous all-time high of $1,030/ounce hit in March 2008) has to do with the sliding value of the US dollar against other leading currencies...
  For many years now, surplus liquidity from all over the world has flowed into dollar-denominated assets — the currency itself, US government bonds and American money market funds. However, the steadily sliding value of the US dollar in recent times, coupled with the country’s economic troubles, has stoked fears that the dollar could be in a terminal decline.
  Those fears have prompted a whole host of global investors, the central banks of many nations included, to look for alternative "safe havens" to park their funds in.
  Gold, once the standard on which all paper money was based, currently appears to be the haven of choice.
  While the People’s Bank of China admitted to progressively adding to its gold reserves in April this year, India’s own Reserve Bank of India has recently bought a whopping 200 tonnes of gold from the International Monetary Fund to buttress its gold reserves.

 It isn't just central banks recently looking to diversify their money reserves. Private investors have been doing this for years.

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 Another myth that Wall Street tries to imply is that the people who own gold all bought it at the top in 1980. The chart above shows how an increasing percentage of gold investors bought gold recently, and thus are sitting on healthy profits.
  What's more, the price of gold was only above $800 for all of three trading days in 1980, so hardly anyone even had the opportunity to buy at the top. It was a parabolic spike that saw its price go up nearly four-fold in the space of just 13 months.

  Now compare that to today's gold market, where it hasn't gone up by more than 23% in any one year. Based on that, does today's gold market look more like a bubble or a bull market?
 Has too much money already gone into the gold sector? Why is gold going up now?

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 Gold is going up now for a very simple reason: governments all over the world are printing massive amounts of it in order to fight the global recession. It's really not very hard to figure out. When you create a massive supply of something out of thin air you cheapen the value of it.

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 So what does record high prices in gold mean? It means that faith in paper currencies, the dollar in particular, are at record lows. Gold's function in today's world is to be the canary in the coal mine. It is simply doing what it is supposed to be doing. Nothing more.

  Is now a good time to buy gold? Not if you are looking to make a quick killing like the house flippers were in 2006. This is a bull market, not a bubble market. Vicious price corrections could happen at any time without notice.
  Will gold go down one day? Yes, when interest rates and government deficits return to historic norms. When it finally does happen the price of gold will probably drop a great deal, but that isn't going to happen any time soon.
  Will gold ever be considered a bubble? Yes, if the public starts to participate. Any bull market, once it goes on long enough, can become a bubble. When your neighbors and coworkers start recommending gold mining stock to you, or start bragging about how much their bullion has appreciated in value, then you should start selling.
  Could the gold bull market top already be in, and it will do nothing but fall from here? Anything is possible. Our paper dollars could become the most valuable assets on the face of the Earth tomorrow. But I prefer to look at what is likely to happen.

 One last point worth addressing is the opinion that people only buy gold in the case of the apocalypse. In that scenario it makes more sense to buy canned food and shotguns instead of gold.
  This idea has no basis in history. When the currencies melted down in Argentina, Zimbabwe, and Weimar Germany it wasn't the apocalypse, but people that owned gold retained their savings. You can still buy canned food and shotguns if you want, but they aren't a good investment for any likely scenario to come.

Originally posted to gjohnsit on Sun Nov 22, 2009 at 10:09 AM PST.

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Comment Preferences

    •  Two points: (2+ / 0-)
      Recommended by:
      corvo, neroden

      The amound of gold needed to buy bread is NOT the same as it was during Babylonian days.

      Gold standard determines money mass, so in the equation:

      M x V = P(r) x p

      M is constant. Assume constant velocity.

      Now assume M rises at 2% per year. If V is constant, and P(r) rises at more than 2% per year (which it does), then you're going to have a massive deflation (which is why the gold standard is a bad idea).

      Secondly, in Your diary you write that the advertisements would be the opposite, if gold were a bubble. But that's not necessarily true. We know the major players bought into the real estate bubble, so why not the gold one?

      Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

      by Dauphin on Sun Nov 22, 2009 at 11:04:32 AM PST

      [ Parent ]

    •  Five points: (0+ / 0-)

      (1) Gold does have some innate demand -- electronics and jewelry.  Of these electronics is more stable because so little is recycled in electronics.

      (2) Gold is a commodity which behaves like money in the speculative markets, but has none of the day-to-day utility of money (any more).  These are exactly the conditions under which, barring an actual change in supply (mines) or demand (electronics and jewelry), it can only increase in price due to speculative bubbles.  Everyone has to sell it eventually.  

      Gold is undergoing a continuous long-term process of demonetization, just like silver (which also used to trade like money, and doesn't any more).  Eventually it will stop trading like money and its value will go down very, very, very, very, very low.

      (3) Therefore this is a bubble and it's going to crash in value.  God knows when.  I think gold tends to be a leading indicator of trouble, so I think gold will crash before the next major economic problem.

      (4) This isn't to say that paper money is a great investment, but to be blunt, almost anything is more useful than gold.  I favor spices for the apocalypse preparations myself.  :-)

      (5) If you are going to buy gold, be aware that its sole utility is in its portability as a store of value and its "universality" -- so get physical gold.  A piece of paper asserting that you own gold in someone else's vault is positively worthless, unless you're a commodities speculator.

      -5.63, -8.10. Learn about Duverger's Law.

      by neroden on Sun Nov 22, 2009 at 01:12:55 PM PST

      [ Parent ]

      •  I guess you aren't aware (0+ / 0-)

         Gold is undergoing a continuous long-term process of demonetization, just like silver (which also used to trade like money, and doesn't any more).  Eventually it will stop trading like money and its value will go down very, very, very, very, very low.

         I guess you aren't aware that central banks have become net buyers of gold. Thus the process of demonetization haas not only stopped, but reversed.

        "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

        by gjohnsit on Sun Nov 22, 2009 at 01:54:05 PM PST

        [ Parent ]

        •  But if you note the "long term" (0+ / 0-)

          portion of the argument, it could very well still hold true.

          You cannot depend upon American institutions to function without pressure. --MLK Jr.

          by Opakapaka on Sun Nov 22, 2009 at 03:34:17 PM PST

          [ Parent ]

          •  The long term trend (1+ / 0-)
            Recommended by:
            Opakapaka

            The long term trend was changing anyway.
             Last year the central banks sold less than 300 tonnes of gold, even though the limit was 500. So far in the new agreement they have sold just 1.5 tonnes.

             More importantly, the central banks of the world have spoken loud and clear that they are losing faith in the dollar.

             There is always a level of denial when a secular bull market starts. If there wasn't then it would turn into a bubble.
              If there wasn't people here denying that anything had changed concerning gold then I would be a lot more concerned about my gold investments.

            "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

            by gjohnsit on Sun Nov 22, 2009 at 05:06:18 PM PST

            [ Parent ]

      •  lol..neroden...Got saffron? n/t (0+ / 0-)
      •  One other thing (0+ / 0-)

        I think gold tends to be a leading indicator of trouble, so I think gold will crash before the next major economic problem.

         I agree that gold is a leading indicator of trouble, but in case you didn't notice from 2008, that means that is rises when major economic problems hit.

        "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

        by gjohnsit on Mon Nov 23, 2009 at 10:28:13 AM PST

        [ Parent ]

    •  As long as you have a civilized society (1+ / 0-)
      Recommended by:
      neroden

      gold is great.

      It seems to me many of the goldbugs are also the same people waiting for the destruction of civilization. They are buying guns and ammo too. Tell me how valuable gold will be in a post apocalyptic world?  Not very. Its too heavy to carry around you need too much space to hoard large quantities and so much of your cost would be just in protecting it.  In those times (not that I think we are heading there) food, water, shelter and friends will be the assets you need, not gold. I think gold is a fine investment but its being coveted for the wrong reasons by many folks in my view.

      •  So you didn't read the last paragraph (2+ / 0-)
        Recommended by:
        joeshwingding, gbgasser

        I've already addressed this.

        "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

        by gjohnsit on Sun Nov 22, 2009 at 01:50:52 PM PST

        [ Parent ]

        •  There is a large difference between (0+ / 0-)

          Weimar Germany, ZImbabwe and Argentina and an apocalypse which involves most of the civilized world. Sure isolated currency crashes in small countries will still have a safe haven for gold mainly because the outside world is functioning normally.  ZImbabwe is an active process now, Weimar Germany was a result of stupid post war reparation policies targeted at Germans and Argentina, as I understand it, was IMF/World Bank precipitated (didnt last long either)

          An apocalyptic scenario (once again that I am NOT buying into) that involves the US and most of the rest of the western world is what I am referring to. That type of unrest would likely not be a gold seeking world.  Gold is in many ways a luxury item (hence the cost of it) and rudimentary social conditions dont have luxuries.

          •  A low chance scenario (0+ / 0-)

            An apocalyptic scenario (once again that I am NOT buying into) that involves the US and most of the rest of the western world is what I am referring to.

            What you are referring to happened almost never. What I describe happens every so often.

             However, if you are referring to the fall of civilization, the last time that happened was the Fall of Rome.
             When that happened, Roman gold coins were used as money for centuries afterward.

            "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

            by gjohnsit on Sun Nov 22, 2009 at 02:24:04 PM PST

            [ Parent ]

  •  But -- it's shiney! and pretty! and (5+ / 0-)

    it's distracting me from thinking too hard! shiney! pretty!

  •  Third Rail. You Stepped on It. (9+ / 0-)

    Actually, I started moving into gold last year. But only because the fundamentals insisted on it. I had never been interested before -- however, numbers are numbers.

    It never occurred to me that people had "opinions" about gold. Strong opinions. They call you names if you mention it. Where did all of that come from? It's a shame, really, not to protect yourself due to some weird prejudice.

    •  So long as you're willing to... (5+ / 0-)

      ... sacrifice indigenous cultures, destroy the landscape and poison the waters to protect yourself.  The way it looks to me, that's some pretty short-sighted, even stupid, "protection."

      Yeah, I got some "opinions" about gold, all right.

      Grab all the joy you can. (exmearden, 8/30/09)

      by Land of Enchantment on Sun Nov 22, 2009 at 10:36:08 AM PST

      [ Parent ]

      •  Like I Said, It Never Occured to Me (2+ / 0-)
        Recommended by:
        gjohnsit, neroden

        My father was a jeweler.

      •  Why do you drive a car then? (6+ / 0-)

        Far more damage has been done to the environment, indigenous cultures, and the landscape, not to mention the oppression of women, due to mankind's thirst for oil.

         Unlike gold, of which 98% in the world has been mined years (and maybe centuries) ago, the oil you put in your car damaged all those things within the last few months.

        "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

        by gjohnsit on Sun Nov 22, 2009 at 10:42:40 AM PST

        [ Parent ]

        •  Have you seen the footage of the gold mine... (2+ / 0-)
          Recommended by:
          Annalize5, neroden

          ...in "Koyaanisqatsi?"  One of the few sequences with the visceral visuals to compare with burning oil wells in Kuwait.  One pillage does not cleanse another.

          •  Gold mining is very destructive (4+ / 0-)
            Recommended by:
            Sparhawk, joeshwingding, OHdog, ArtSchmart

            I'm not denying that. But then so is coal mining, and copper mining, and oil drilling, not to mention the use of all these things.

             I should point out that the use of gold is NOT environmentally destructive.
             If we factored in the destructive from use (thinking global warming here), I'm willing to bet that gold doesn't match up too badly.
             

            "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

            by gjohnsit on Sun Nov 22, 2009 at 12:20:54 PM PST

            [ Parent ]

            •  Resource extraction... (2+ / 0-)
              Recommended by:
              Mnemosyne, joeshwingding

              ...is an inherently environmentally destructive activity, but what's the alternative? Give up our modern industrial standard of living to stop it?

              I mean, for sure, let's minimize environmental damage and perhaps forego specific projects at times because they are too destructive, but a lot of hazardous materials were mined just to make the computers we are all typing on...

              •  Alternative: recycling. (1+ / 0-)
                Recommended by:
                Pluto

                Really, an awful lot of resources have already been extracted, and are sitting in landfills or other environmentally-highly-damaged locations.  If population stabilizes, then we won't need to continuously produce more resources, we can largely recycle what we already extracted.

                -5.63, -8.10. Learn about Duverger's Law.

                by neroden on Sun Nov 22, 2009 at 01:24:35 PM PST

                [ Parent ]

            •  Coal & oil are destructive... (0+ / 0-)

              ... and we desperately need to move the economy towards getting rid of them.  But, as you noted, gold has only symbolic value - no useful function.  Or rather, little useful function - it's good for some dental and electronic purposes anyhow.  Those fossil fuels do provide useful function, at least.  Transportation, heat, electricity.

              That said, I've done a lot of work to keep my carbon footprint down.  Drive one of the highest mpg gallon cars available presently.  Home is almost exclusively passive solar heated.  Have planted and nurture quite a lot of trees.  And so on.

              Gold is destructive, with nothing on the plus side for all the ravages of its production.  Nothing.  So, no, you've presented a false equivalency here.  And here I thought you'd just neglected to include that.  Instead you defend that destruction.  

              A bit of a disappointment, that.

              Grab all the joy you can. (exmearden, 8/30/09)

              by Land of Enchantment on Sun Nov 22, 2009 at 02:35:30 PM PST

              [ Parent ]

              •  you forgot (0+ / 0-)

                Those fossil fuels do provide useful function, at least.  Transportation, heat, electricity.

                Pollution... don't forget pollution. Air, water, mining.

                Solar panels? Where do those products that manufacture them come from?

                Look I am all for reducing our carbon footprint... but basically our mere existence here on this planet produces some unwanted effects regardless. Unless we all would like to return to the way the Native Americans lived its not going to be zero.

                Not Guilty! ~Captain Lincoln Sternn

                by joeshwingding on Sun Nov 22, 2009 at 03:08:50 PM PST

                [ Parent ]

                •  I don't have any solar panels. (0+ / 0-)

                  Passive solar isn't solar panels.  Maybe you knew that and just had a bit of a slip.  Possibly, you're speaking out of ignorance.

                  But gold's main value, almost exclusively, is symbolic.  No actual usefulness, except a tiny percentage noted in an earlier comment.  I don't see the point of real destruction for a symbolic value.

                  Grab all the joy you can. (exmearden, 8/30/09)

                  by Land of Enchantment on Sun Nov 22, 2009 at 03:16:16 PM PST

                  [ Parent ]

                  •  mostly out of ignorance (0+ / 0-)

                    now I know.

                    golds main use is to serve as money. And is no more symbolic than any other entity passing as money.

                    Cutting down the entire forest to subsidize bank and gov't debt is equally destructive and perhaps more destructive.

                    Not Guilty! ~Captain Lincoln Sternn

                    by joeshwingding on Sun Nov 22, 2009 at 03:39:18 PM PST

                    [ Parent ]

              •  Don't play that with me (1+ / 0-)
                Recommended by:
                joeshwingding

                My carbon footprint is far smaller than yours. I've commuted by bike for years. My home has no air-conditioner and rarely uses a heater.
                   So back off on the holier-than-thou.

                Do you think that fiat money has no destructive qualities? It ravages the middle-class is what it does. Do you think that doesn't have side effects, both economic and environmental?
                 You are missing the bigger picture.

                "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

                by gjohnsit on Sun Nov 22, 2009 at 05:11:07 PM PST

                [ Parent ]

                •  Holier than thou? (0+ / 0-)

                  Gold is destructive with virtually no useful purpose, only symbolic.  Which I brought up to fill out your story, as an aspect left out.  

                  As to my carbon footprint, I only brought it up to defend against your accusations about using oil.  FWIW, I work telecommute from home, so no big carbon footprint there.  And put my clothes on a clothesline rather than use a dryer, too.

                  But I don't invest in gold.  Partly because I ain't got much in the way of assets to put to such purposes.  But also because it's destructive.  I've been planting fruit trees as an investment.  Different kind of approach than yours.

                  I did start out cordial on this, adding something that it seemed to me you left out of the diary.  You were the one got accusatory.  So, it would seem, you're the one started up playing that angle.  Not me.  And being rather obnoxious about it, really.  

                  Might be time to take you off my subscriber list.  This has gotten rather disagreeable.

                  Grab all the joy you can. (exmearden, 8/30/09)

                  by Land of Enchantment on Sun Nov 22, 2009 at 06:13:28 PM PST

                  [ Parent ]

    •  It's weird (4+ / 0-)

      The same people who didn't hesitate to buy subprime condos and McMansions with OptionARM mortgages at the height of the housing bubble actually think that gold is somehow beneath them. How can an investment be beneath you when you have already sunk to the bottom?

       And Wall Street is no better. After all the toxic waste they've sold to investors, how can they act superior about anything?

       You have to think it comes from somewhere. If I was to guess, I would have to ask "Who has the most to lose by gold's rise?"
        That would be the Federal Reserve. I'm willing to bet that central banks love/hate gold with a passion.

      "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

      by gjohnsit on Sun Nov 22, 2009 at 10:38:36 AM PST

      [ Parent ]

    •  Anyway, My Best Bet on Gold (3+ / 0-)
      Recommended by:
      Mnemosyne, gjohnsit, joeshwingding

      ...is gold I don't even own, nor can I. This is a current account with 5 little gold and silver buys in July that have cost me $500.

      Profit as of this morning = $33,800.

    •  I'm conflicted between deflation or inflation (3+ / 0-)
      Recommended by:
      Mnemosyne, corvo, Pluto

      or stagflation, or deflation then hyperinflation, or straight to hyperinflation.  

      Actually I'm leaning towards deflation right now, and gold should decline - unless there's a short gold squeeze on slimeball fuckers like Goldman Sachs then gold would go to the moon!

      But then the markets would implode and the dollar carry trade would melt down, and gold would crash too.  

      I'm reading this and I'm thinking Butters on South Part could be saying this!  

      Just let me know when dogs and cats start living together - probably in 2012.  

      ...someday - the armies of bitterness will all be going the same way. And they'll all walk together, and there'll be a dead terror from it. The Grapes of Wrath

      by deepsouthdoug on Sun Nov 22, 2009 at 11:14:28 AM PST

      [ Parent ]

  •  Gold is a good idea... (6+ / 0-)

    ... only if you put on blinders to the destruction of the landscape, the poisoning of the waters, the destruction of indigenouc cultures for its production.  Because if you think gold's a good idea, then you're in favor of those things, too.  They're part of the unacknowledged cost of gold.

    New World Indians figured the Spanish must eat gold.  Couldn't figure out any other reason to crave it so much.

    When you're talking about gold, that's something not to overlook.  The majority of gold sold in the world goes for gold jewelry, mostly to women in South Asia, who aren't allowed to own other kinds of assets for the most part.  So it's tied to oppression of women, too.

    Grab all the joy you can. (exmearden, 8/30/09)

    by Land of Enchantment on Sun Nov 22, 2009 at 10:33:58 AM PST

  •  Like baseball cards and art (6+ / 0-)

    gold is considered a collectible and taxed as one (ie 28% on "long-term" holdings).  Thus you must figure that into your return to beat stocks/bonds (unless you are just playing the miners anyways).  Also, if you plan to hold the actual physical stuff (instead of an ETF like GLD) then you had better be prepared for enormous transaction costs to eat away a significant portion of your returns.  Essentially, you need gold to not only beat the market by 18%, but additionally you need to overcome the transaction costs which can run $50/ounce.  It has done well recently vs other investments, but it is very tough from a tax/transaction cost standpoint to continue to win.

  •  I'll reccomend this (1+ / 0-)
    Recommended by:
    Pluto

    because I want other people to read it, but make no doubt,

    gold is in a bubble.

    if you buy gold at this price,

    you're gonna get creamed.

    value stocks, emerging markets, and high-quality municipal bond funds are the way to go.

    I'll stop arguing with you when you start agreeing with me.

    by bourbonblue on Sun Nov 22, 2009 at 10:39:06 AM PST

    •  Wow (4+ / 0-)

      If you want to talk about bubbles then emerging market stocks and muni bonds are the place to be.
       In fact, the muni bond market is a 100% certainty to melt down in the coming year or two.

       I made my point about gold's alleged bubble. I've been hearing that for several years now, yet no one ever bothers to try and prove it.

      "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

      by gjohnsit on Sun Nov 22, 2009 at 10:46:04 AM PST

      [ Parent ]

      •  Well, (2+ / 0-)
        Recommended by:
        cotterperson, corvo

        I won't say with certainty that gold is in a bubble or that it isn't, since I'm not entirely sure.

        I do know, however, that there is a false discrimination in your diary: Gold can be both a hedge against inflation and against the weakness of a currency.

        Consider: Inflation is one of the standard methods of ending a recession (it drives investment and consumption since saving suddenly becomes less attractive). We are not talking about hyperinflation, of course. Now, this directly affects China because of its enormous dollar reserves and the Treasury bonds it holds: A fall in the value of the dollar screws them big time. In short, a sensible policy with regard to recession screws them. If I were them, I'd try to shield my savings, too.

        Of course, that's connected to the fall in the dollar's exchange rate: Inflation and low interest rates tend to lead to a depreciacion of the currency. Which, again, screws the Chinese because of their peg.

        Furthermore, the same rational existed before the crisis: During the hectic days before the recession overheating (the possibility of inflation because supply cannot keep pace with demand) was a real possibility.

        Iuris praecepta sunt haec: Honeste vivere, alterum non laedere, suum cuique tribuere. - Ulpian, Digestae 1, 3

        by Dauphin on Sun Nov 22, 2009 at 10:56:14 AM PST

        [ Parent ]

        •  you forgot the other party (3+ / 0-)
          Recommended by:
          gjohnsit, Annalize5, bourbonblue

          connected to the fall in the dollar's exchange rate: Inflation and low interest rates tend to lead to a depreciacion of the currency. Which, again, screws the Chinese because of their peg.

          and screws the entire US by lost purchasing power. In a time when wages are shrinking we are getting doubly screwed by having to pay more for the things we consume ... like food.

          Consider: Inflation is one of the standard methods of ending a recession (it drives investment and consumption since saving suddenly becomes less attractive).

          It works until it doesn't work. It doesn't work if you incorrectly diagnose the problem in the first place. A recession is a brief economic downturn caused by accelerating expansion. A depression is an economic collapse from to much leverage in the system. Which one are we experiencing?

          Not Guilty! ~Captain Lincoln Sternn

          by joeshwingding on Sun Nov 22, 2009 at 12:19:43 PM PST

          [ Parent ]

          •  Well, actually it can work (0+ / 0-)

            Inflation can be used to eliminate debt without destroying businesses (by making it possible to pay off the debt in inflated dollars), which means it can be used to remove "too much leverage" from the system without further economic damage.

            Inflation can also be used in ways which don't have the effect of eliminating debt, if the government isn't careful about it, however.

            -5.63, -8.10. Learn about Duverger's Law.

            by neroden on Sun Nov 22, 2009 at 01:19:05 PM PST

            [ Parent ]

            •  Incomplete thought (1+ / 0-)
              Recommended by:
              gjohnsit

              What happens to the currency when you eliminate debt by printing?

              it can be used to remove "too much leverage" from the system without further economic damage.

              Can you identify one instance where this has happened?

              Not Guilty! ~Captain Lincoln Sternn

              by joeshwingding on Sun Nov 22, 2009 at 01:58:38 PM PST

              [ Parent ]

      •  Agreed, gjohnsit (0+ / 0-)

        We don't always see the same picture but in this we do. Muni bonds are noplace to be, and emerging markets are very choppy. BSBR seems to have taken many for a ride. But his recommendation of "value stocks" is intriguing. Large firms don't look to be all that promising if you want to beat inflation.

        A possible strategy now is to look for the small caps that survive the downturn. HNSN, BWEN, LVLT - firms like that are extremely beaten down from their highs and have nearly endless upside if they make it. Even C has some attractiveness. Needless to say, anybody who bought F at $1.50 is content.

        But bonds? Ish doan thank so.

        Every day's another chance to stick it to The Man. - dls.

        by The Raven on Sun Nov 22, 2009 at 12:46:23 PM PST

        [ Parent ]

        •  Bonds are a bubble that hasn't burst (2+ / 0-)
          Recommended by:
          corvo, neroden

          The stock bubble burst. The real estate bubble burst. But the bond bubble was kept from bursting by massive intervention by the Fed.
            However, even that is coming into danger. Commercial MBS's are imploding right now (taking out regional banks with it).
            Meanwhile state and local budgets are in the process of imploding. Even if the recovery actually does happen (something I don't believe yet), state and local budgets will continue to suffer for several years to come. All the easy cuts have already been made. Next they start cutting bone. After that they default. It's going to get very fugly.

          "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

          by gjohnsit on Sun Nov 22, 2009 at 01:04:10 PM PST

          [ Parent ]

          •  Or they could raise taxes on the rich. (0+ / 0-)

            This would solve most of the state budget deficits.  Localities don't have that option generally, but states could restore state aid.

            -5.63, -8.10. Learn about Duverger's Law.

            by neroden on Sun Nov 22, 2009 at 01:15:37 PM PST

            [ Parent ]

            •  Even that wouldn't cover it (0+ / 0-)

              The loss in revenue is far larger than just raising taxes on one sector of society.

              "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

              by gjohnsit on Sun Nov 22, 2009 at 02:01:07 PM PST

              [ Parent ]

      •  Muni market has nil chance of meltdown. (1+ / 0-)
        Recommended by:
        bourbonblue

        Look at what happened in the Great Depression.  General Obligation bonds did just fine.

        Watch out for "specific revenue" bonds, which are much more likely to default than general obligation bonds.

        -5.63, -8.10. Learn about Duverger's Law.

        by neroden on Sun Nov 22, 2009 at 01:17:04 PM PST

        [ Parent ]

        •  What happened in the Great Depression (0+ / 0-)

          was that municipal bonds defaulted at epidemic levels. I think you need to recheck your facts.

          "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

          by gjohnsit on Sun Nov 22, 2009 at 02:09:50 PM PST

          [ Parent ]

    •  I Opened an Account (Real Money) (2+ / 0-)
      Recommended by:
      gjohnsit, corvo

      ...a few weeks ago to test that theory. I'm buying small amounts of gold and silver at the top of the market. No stops. We shall see. Of course there's plenty of margin to ride out the downturns.

      I fully expect gold and silver to follow the five and ten year trends. Especially in Dollars.

    •  Adjusted for inflation, its not near 1980 peak (5+ / 0-)

      http://www.inflationdata.com/...

      With both China and India moving out of dollar denominated investments and into gold, it should go up quite a bit yet.

      Also, John Paulson, one of the more astute current investors, is starting a new gold fund, putting in  $250M of his own money: http://tinyurl.com/...

      Right now I would not be long in dollars but rather on a tracking ETF like GDX or GLD.

      "I have no special talents. I am only passionately curious." A. Einstein

      by bewert on Sun Nov 22, 2009 at 11:21:16 AM PST

      [ Parent ]

    •  This (1+ / 0-)
      Recommended by:
      bourbonblue

      Imagine for a moment that there is an asset that has gone up in dollar value every single year for eight straight years, is about to have one of its best years in 2009, and is the best performing asset class of the decade.
      Imagine that this asset has been going up in value in every currency in the world over the last five years.
       Imagine that worldwide demand for it is hitting all-time records while outstripping supply. At the same time worldwide production of it has fallen 10% over the same period.
      Imagine that worldwide government selling of this asset has turned into worldwide government buying of this asset for the first time in over 40 years.
      Imagine that all the major commercial producers of this asset are positioning themselves for years of rising prices.

      sure sounds like an overbought market to me.

      My question is, if gold has no real industrial use, why not buy copper or aluminum or zinc instead?

      You cannot depend upon American institutions to function without pressure. --MLK Jr.

      by Opakapaka on Sun Nov 22, 2009 at 12:42:53 PM PST

      [ Parent ]

    •  What about the fact that... (0+ / 0-)

      ...we're printing money like crazy.  WHich, in every other instance in time, has always led to an extraordinarily high level of inflation, which should cause gold to rise (China is kind of making this bet, diversifying away from treasuries with a "basket" of commodities, this should lead them to attempt to crush our currency in the next 5 years once they're suitably hedged).

      "Out on the edge you see all the kinds of things you can't see from the center." - Kurt Vonnegut

      by Mister Gloom on Sun Nov 22, 2009 at 02:33:02 PM PST

      [ Parent ]

  •  I have gold coins most from the late 1800s (5+ / 0-)

    a few new ones from the mint I haven't bought any in over 2 years though because I think the price is to high, the morgan silver dolars  etc  I have almost the entire collection now, but the reason is more alure as anything else, my grandfather was born in 1833 and went West in 1851 after gold was found  he stayed in the west until 1899 when he moved the family back to Michigan  my father was born on Feb 24, 1900  and his father died April 4 1900 he was six weeks old  his mother died when he was 14     I am basically building the collection for my son   100 year old coins are a finite group and it's art to me.....and if paper money becomes worthless  I should still be able to use the gold or silver to find food I would think......

  •  Isn't the love of gold what started... (5+ / 0-)

    the whole world crying? Greed. Power. Wall Street.

    Imagine for a moment that there is an asset that has gone up in dollar value every single year for eight straight years, is about to have one of its best years in 2009, and is the best performing asset class of the decade.

    I imagined. Here's what came to mind since we're speaking in the language of myth.

    golden calf

    Compare the two images.

    golden cald wall street

    The Golden Calf’s All Growed Up  
    posted by Paul Constant on October 29, 2008

    Apparently, some Christians are on Wall Street, putting their hands on and praying over a large brass bull in the hopes that God will save the world’s economy and transform the United States from a bull and bear economy to a lion (of God) economy. Do these people actually read the book they’re supposed to be following?

    Oh, and I must include this clip just for fun.

    So yes, the "myth" remains but has it indeed become one of "the primal forces of nature"?

  •  There are industrial uses for gold (6+ / 0-)

    ..beises jewelry and bullion. Electronics especially, but also in medicine, dentistry, optics, glassmaking etc.

    Had I any spare funds a couple of years back I would be sitting a mite prettier financially today. Of course it was going to go up against the dollar.

    Living a few miles from gold-country, I should probably go find some since I can't buy any.

    Look! A recently married gay immigrant couple at an abortion clinic! Teabags!

    by Anthony Page aka SecondComing on Sun Nov 22, 2009 at 11:20:48 AM PST

    •  About 10% of gold is used in industry (2+ / 0-)

      That's about 380 tonnes a year. Which is nothing to sneeze at.
        However, even when gold was at its bottom in 1999-2001, gold demand was dominated by jewelry demand.

      "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

      by gjohnsit on Sun Nov 22, 2009 at 12:28:17 PM PST

      [ Parent ]

    •  Great observation (3+ / 0-)

      I was going to make it myself if no one else did. So thank you for that.

      A couple of thoughts in addition to the diarist's: India did buy 200 tonnes of gold and realigned the market a bit.

      In addition to shoring up its currency strength, India is a one of the world's largest consumers of gold, and they use it for jewelry in very large quantities. Much as Japan views domestic rice production a strategic asset, India tends to feel that way about gold.

      With Russia and China buying it in large amounts (China is actually looking to corner the market entirely if it can) for currency bolstering, and with production down, all signals point to a further rise in the price of gold.

      One of the easiest ways to purchase gold is through an ETF, such as GLD. This is very liquid and can be traded as any other ETF. A well diversified portfolio should have some amount of GLD or similar as a simple hedge.

      It tends to move in opposite directions to the dollar, it is affected by the price of oil, estimates of GDP, and is relatively stable when other sectors of the market are choppy.

      It's really nice on a day when most securities are in the red that GLD is trending upward and canceling out some of your losses. I would argue that for private investors, GLD (or equivalent) be thought of as a hedge and not the source of a potential windfall. It's usually a conservative move.

      Every day's another chance to stick it to The Man. - dls.

      by The Raven on Sun Nov 22, 2009 at 12:39:09 PM PST

      [ Parent ]

  •  it's all perspective . . . (10+ / 0-)

    I bought a house 40 years ago for $16,000 which despite the collapsing market "they" say is still worth well over $500,000 now (granted some improvements have been made).  Gold over the same period has increased in "value" by a factor of about 30.  See some similarity?

    Gold isn't worth more, and neither is my house (but their relative value remains the same).

    It's the dollar that is worth a whole lot less . . .

    Fake Left, Drive Right . . . not my idea of a Democrat . . .

    by Deward Hastings on Sun Nov 22, 2009 at 11:27:31 AM PST

  •  I like your 'since 2000' graph. (3+ / 0-)
    Recommended by:
    pHunbalanced, corvo, Pluto

    Do you have one dating back a hundred years or so, updated for inflation?

    If so, is it a steady rise, or does it peak and trough, peak and trough over time, as other investments 'do better' and the smart money moves in and out?

    Those who labour in the earth are the chosen people of God. - Thomas Jefferson

    by Ezekial 23 20 on Sun Nov 22, 2009 at 11:34:26 AM PST

  •  Excellent piece, gjohnsit ... (7+ / 0-)

    ...and I learned plenty.

    Just one caveat, however. All the talk about gold being at record highs is based on nominal dollars. In inflation-adjusted terms, the current price of around $1150 an ounce is not even close to the $2189 reached for those few days in 1980.

    Don't tell me what you believe. Tell me what you do and I will tell you what you believe.

    by Meteor Blades on Sun Nov 22, 2009 at 11:43:43 AM PST

  •  This is an interesting diary (2+ / 0-)
    Recommended by:
    neroden, bourbonblue

    One point though: Those of us who couldn't afford to buy gold at $ 300.00/oz sure as fuck can't afford it now.

    Gold bugs were 'in' in the early 80s, early 90s and now.

    If gold were to double in price in USD, this will be largely an academic issue as most of us will be manning the barricades and keeping hunger at bay.

    Keep talking. Most of us have more important day-to-day problems to deal will.

  •  Somebody has to say it (2+ / 0-)
    Recommended by:
    Mnemosyne, gjohnsit

    We have a gold diary and nobody has said ...

    You cant eat gold!

    Not Guilty! ~Captain Lincoln Sternn

    by joeshwingding on Sun Nov 22, 2009 at 12:34:46 PM PST

  •  The biggest myth is that you can't have fiat (0+ / 0-)

    money based on gold.

    Ask yourself: are you going to carry around bullion in your pocket?

    No.

    You will have either paper or electrons that have a value as a decimal fraction of a gram of gold.

    Maybe 1 dollar is 1/1000th of a gram of gold.

    All you have to do to fiat the gold money is declare that 1 dollar is now worth 1/2000th a gram of gold and you can double the money supply.

    a hard rain's gonna fall

    by Paul Goodman on Sun Nov 22, 2009 at 02:18:25 PM PST

    •  Untrue (0+ / 0-)

      are you going to carry around bullion in your pocket?
      No.

      I have in the past. Although most people would carry silver around in their pocket.

      "The people have only as much liberty as they have the intelligence to want & the courage to take." - Emma Goldman

      by gjohnsit on Sun Nov 22, 2009 at 02:26:48 PM PST

      [ Parent ]

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