Author Topic: Gold Myths??  (Read 1491 times)

Offline mckeyes

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Gold Myths??
« on: April 21, 2011, 10:25:54 AM »
3 myths that will pop the gold bubble

This has to be one of the worst articles written to convince people not to invest in gold. [sarcasm]Keeping putting your money in the market people. Pay no mind to that gold and silver. After all, it's not an investment.[/sarcasm]

And of course the only way to comment on the article is if you have a Windows Live account.  :(

Offline tamo42

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Re: Gold Myths??
« Reply #1 on: April 21, 2011, 10:53:15 PM »
I actually have a few minutes and half a brain here, so I'll debunk for those who don't want to RTFA.

Claim 1: Gold isn't an investment because it doesn't produce value and income over time whereas stocks, bonds, real estate, livestock, and capital equipment do.

Debunk 1: On the surface, this is totally nonsensical. If the criteria for an investment is that it needs to create value and income, then the vast majority of stocks and bonds are out. Most stocks don't pay dividends and most bonds don't produce value (in excess of discounted cash flow if a non-coupon bond). If the author doesn't understand Boolean logic (likely) and actually meant that an investment needs to create value OR income, then gold today clearly has more value than gold 10 years ago. So value was created. Additionally, the purpose of an investment is the expectation that the money will produce a return, not the guarantee that it will. If life were guaranteed investments wouldn't exist at all. The fact that over some periods a particular investment might not do well has nothing to do with whether it is an investment or not. Heads I win, tails the author is an idiot.

Claim 2: Gold isn't a store of value because it lost value from 1980 to 2000 when there was inflation.

Debunk 2: Clearly the author cherry picked his data. 1980 was the peak following the freeing of the gold market after 1975. Even then gold went from $65 to $900 to to $250 or so. Obviously there was a run up and then a falling out, but it came out much higher than it went in. Additionally, the author admits that the rate of inflation became negative after 1980 where it was very much positive in the late 1970s. This suggests that his premise is flawed and gold responds more to the rate of inflation rather than the absolute value of inflation. There are all kinds of problems with the simplistic assumption that inflation = increase in gold price. It is one factor among many.

Claim 3: People say gold is a contrarian trade, but it's very mainstream now.

Debunk 3: The author cites two pieces of information to support his claim. The first is that the price of gold is widely followed on Yahoo! Finance and similar media outlets. The second is that there is a "We Buy Gold" shop on every corner.

Let's examine the first support. Awareness of the price of something doesn't have anything to do with whether or not people are participating in a market. Everyone knows the price of gas, but very few buy gasoline futures. There are more people buying gold than there used to be, true, but it's a LONG way from the participation rates of other asset classes like stocks.

The second piece of support is so dumb it's truly mind-boggling. If there is a "We Buy Gold" store on every corner it's because people are SELLING. In case the author isn't aware, selling is the opposite of buying into a mainstream trend. Every exchange has a short and a long. The sellers of gold are going long on the US Dollar and shorting gold. Again, just to be clear, this means that the masses are doing the opposite of participating in a speculative bubble.

Reality (my version): Gold has many different functions and associated reasons to buy it (or not). Most people think it's pretty. A very few people think it makes for excellent conductive pathways. A few more figure that people have always found it pretty and it's very hard to get more of it. As a result, the value (where supply meets demand) is rather stable. Yes, the gold market is a market like any other, prices rise and fall in response to changes in people's preferences (demand) and how much is available (supply). Currently, the trend is for an increasing awareness of the stability of gold's purchasing power in contrast to the never-ending decay of fiat money's purchasing power. There will be surges and drops along the way, but that trend shows no sign of altering in the foreseeable future. Therefore gold (and other items that are durable, divisible, widely desirable, of limited supply, etc) forms an important function as insurance against currency devaluation.

I was really trying to not be long winded, but oh well :).