Comparing Bitcoin To Gold – Store(s) Of Value?
Mark Cuban claims that Bitcoin is a better store of value than gold. Is he correct?
store of value
Gold Not An Investment – You Won’t Get Rich
GOLD NOT AN INVESTMENT
Perception of gold as an investment is fundamentally flawed. No matter the detail behind the analysis, gold is not an investment.
“A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold” Revisited
One of the earliest articles I wrote was “A Loaf Of Bread, A Gallon Of Gas, An Ounce Of Gold”. The information contained in the article is basic to a fundamental and accurate understanding of gold.
The convolution and complication of basic fundamentals reigns supreme in almost all analysis of gold. That is unfortunate, because it obscures the simple truth.
The simple truth is that gold is real money. Even that simple truth, however, deserves some further explanation.
Gold Nuggets And Silver Bullets
It is very difficult to let go of someone – or something – when we have invested so much time and energy in it. It is even harder when we have invested so much of ourselves in it; when the outcome is not what we expected; when our reputation is at stake.
In this particular case, that something is gold and silver.
The emotional proclamations just a few weeks ago seemed quite strong, almost being religious in their fervor. But after two thrusts of the dagger to the heart, the explanations afterwards seem a bit hollow.
Gold vs. Stocks: Ratios Do Not Prove Correlation
GOLD VS. STOCKS
There is considerable extensive research and lots of articles written about gold vs. stocks. Sometimes, that is done in order to support or justify the argument that stocks are a better, long-term investment than gold. And the results seem to indicate that.
Except that gold is not an investment.
Gold is real money and a ‘store of value’. Its fundamentals have nothing to do with the fundamentals for stocks or any other investments. When gold is analyzed as an investment, it gets compared to other investments. And then the analysts start looking for correlations.
Some say that an ‘investment’ in gold is correlated inversely to stocks. But there have been periods of time when both stocks and gold went up or down simultaneously.
And, classifying gold as an alternative investment, or a safehaven asset, confuses people and creates unrealistic expectations. At least when comparing apples to oranges, we know that both of them are fruits.
What’s Up With Gold?
WHAT’S UP WITH GOLD?
What are we waiting for? The other shoe to drop; the next big move?
Gold’s reign as the “next big thing” ended seven years ago. Too many people don’t want to admit that, but its true. Those who are ‘bullish’ on gold cannot let go.
Their behavior is typical of those who have missed the boat. And they don’t want to admit it, or believe it. And their problem is compounded by the fact that they originally viewed gold as a quality investment.
Now they continue to point out all of the fundamental reasons gold should go much higher. We are told it is undervalued, unappreciated, unloved. And, of course, the price is manipulated, too.
Those things may provide a bit of consolation, but they don’t mask the pain of losing big bucks. And the interminable wait drags on.
We could say it was simply a matter of (poor) timing. However, most people who have a basic understanding of investment fundamentals would argue otherwise.
And they would be right. In the long-term, time works in our favor – not against us. An investment with good fundamentals – over time – becomes more valuable, not less valuable. And that relentless march upwards helps protect us against our own timing errors.
We don’t have to be perfect market-timers to be successful investors.
And it isn’t that gold’s price can’t go a lot higher, either. It can. And it probably will. And it has done so in the past.
After peaking at $850.00 per ounce in January 1980, the price of gold dropped as low as $250.00 per ounce twenty years later and then soared to $1900.oo per ounce in August 2011. But will you (or can you) wait thirty-one years to be vindicated?
There is a better explanation.
At the heart of disappointment regarding gold’s price action is the specter of unrealistic expectations:
“believing that rational individuals would sooner or later realize the trend and take it into account in forming their (opinions)”
But there is more to it. Much more. And it involves fundamentals. And an understanding of price versus value.
To wit, gold has only one basic fundamental: it is real money.
To further clarify, this means that gold is not an investment.
Do people view gold as an investment? Absolutely. Which is why they are continually surprised and confused at their investment results. They buy gold because they expect the price to go up; and logically so.
The problem is that the premise is wrong. When someone invests in gold, they are expecting the price to go up as a result of certain factors which they believe are “drivers of gold”. In other words, they believe that gold responds to certain factors. These factors may include interest rates, social unrest, political instability, government policies/actions, a weak economy, jewelry demand, and various ratios comparing gold to any number of other things.
But, again, that assumes that gold is an investment which is affected by the various things listed. It is not.
And when gold is characterized as an investment, the incorrect assumption leads to unexpected results regardless of the logic. If the basic premise is incorrect, even the best, most technically perfect logic will not lead to results that are consistent.
The price versus value issue is rooted in gold’s fundamental role as real money.
Gold is real money because it meets the qualifications of money. It is a medium of exchange, a measure of value, and a store of value.
The U.S. dollar is a substitute for real money. It is a medium of exchange and a measure of value. But it is not real money because it is not a store of value.
The U.S. dollar, in its role as ‘official’ money, has lost more than ninety-eight percent of its value over the past century.
The price of gold, on the other hand, has increased more than sixty times from $20.67 per ounce to in excess of $1300.00 per ounce.
Gold’s price increase does not mean that it increased in value by sixty-fold. Its price increase is a direct reflection of the ninety-eight percent decline of the U.S. dollar.
Gold is worth somewhere between $1000.00 per ounce and $2000.00 per ounce. This price range correlates to a decline in the U.S. dollar’s value of somewhere between ninety-eight and ninety-nine percent.
At $1300.00 per ounce, gold’s price reflects a decline of 98.3 percent in the value of the U.S. dollar since the inception of the U.S. Federal Reserve Bank in 1913.
Let’s recap.
Gold is real money. It is a store of value. The U.S. dollar (and all paper currencies) are substitutes for real money/original money; i.e., gold.
Gold’s characterization – incorrectly – as an investment (which it is not) leads to unrealistic expectations and unexpected results.
Gold’s value is in its role as real money. Its changing price (ever higher over time) is a direct reflection of changes in the value (ever lower over time) of the U.S. dollar.
As far as gold is concerned, nothing else matters.
(also see How Much Is Gold Really Worth?)
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
What’s Next For Gold? Its All About The U.S. Dollar
What’s next for gold? Seems like a fairly simple question. Unfortunately, it is nearly impossible today to get a simple answer. That’s the problem.
Silver Is Not Real Money
Is silver real money? I don’t think so. But I know that my proclamation will likely draw vociferous contradictions from others who consider themselves “hard-money advocates”.
That’s okay. Let’s look at the facts.
Gold “A Pet Rock”?
Is gold “a pet rock”?
“A pet rock” is how a noted financial columnist has described gold on a couple of occasions within the past year or two. Which is not surprising given the premise for the logic used to arrive at his conclusion. That premise, or assumption, is the reason that most people (financial writers, advisors, investors, and economists included) are incorrect in their analysis of the yellow metal.
That premise/assumption is that gold is an investment. It is not. It is also not insurance or a hedge against chaos. It is real money.
There is only one thing anyone needs to know with regards to the value of gold. And that is the value of the U.S. dollar.
Gold is quoted in U.S. dollars and the dollar is the worlds reserve currency. The “price” of gold in U.S. dollars is an inverse reflection of the value of the U.S. dollar. And yes, it does change continuously, and ongoing. And yes, there are more extreme changes for short periods of time which don’t correlate exactly to changes in purchasing power of the U.S. dollar. But the most extreme changes occur after longer periods of time when the cumulative effects of inflation are recognized more fully by holders of the depreciating paper currency (i.e. U.S. dollar). And since paper currencies (including government debt) can be manipulated by government, expectations and reactions become more volatile.
Without a clearly explicit understanding of the above paragraph, we will continue to see unexpected results which defy our logic if we ‘invest’ in gold as a “hedge against the chaos and resulting breakdown of society”; unless that chaos results in a significant decline and/or breakdown of the U.S. dollar itself.
What is particularly ironic is that the writer states in his article “gold has also preserved its purchasing power over remarkably long periods”. Which is exactly the point. Gold is a store of value and, hence, real money. It is the U.S. dollar which is volatile, and which continues to lose value.
With respect to concerns about some of the more dramatic changes in the price of gold over shorter periods of time, most of the time when those particular examples are cited, they are referenced to the exclusion of more telling facts.
For example, it is a well-known fact that gold in January was priced at $800.00 to the ounce and that its price in U.S. dollars some twenty years later was $275.00 to the ounce. Sounds horrible if you are looking at gold as an investment, right? Of course. But lets assume that our logic based on a faulty assumption (i.e. that gold is an investment) is correct. And then what would have happened if you had bought gold at $275.00 to the ounce in 1999? Its recent price at $1250.00 to the ounce is a nearly three hundred fifty percent increase. And what if you had bought gold prior to 1980? What if you were prescient enough to exchange your U.S. dollars for gold in 1971 at $35.00 to the ounce? By 1980 you would have a profit of nearly twenty-two hundred percent! Are these examples any less valid? No. It is a matter of perspective. And that perspective gets clouded sometimes depending on an individual’s point of view.
Quoting from the same article, “In the shorter term, gold fluctuates so wildly that it is a surprisingly poor hedge against increases in the cost of living.” Does that mean that stocks and real estate are also “poor hedge(s) against increases in the cost of living”? How would your stock broker answer that question?
For most of my lifetime (sixty-eight years) I have owned gold for what I think are the right reasons. It may be a ‘pet rock’ to some folks, but to me it is real money.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!
Gold Is Real Money
Lots of things have been used as money during five thousand years of recorded history. Only one has stood the test of time – GOLD. And its role as money was brought about by its practical and convenient use over time. Gold has it own special characteristics which lend themselves to its role as money quite well.
First, it is scarce. Nearly all of the gold that has ever been mined is still available above ground. And production of new gold averages only (approximately) one percent annually of existing supply. Hence, we are not likely (ever) to see any large or unusual changes in existing supply that would affect its value in a substantial way.
Second, it is malleable (workable). One ounce of pure gold can be hammered into a sheet thin enough to cover a football field.
Third, it is indestructible. It does not rust or corrode and it is not consumable.
Fourth, it is beautiful.
REQUIREMENTS OF MONEY
In order to be functional and reliable over time, money must meet three specific requirements: 1) a medium of exchange, 2) a measure of value, 3) a store of value.
A medium of exchange needs to be liquid and portable; and it needs to be accepted on a universal basis.
To be a measure of value, money needs to be easily incorporated into recognizable forms and amounts for use within various standards of weight and measure.
The most important requirement, though, is that money must be a store of value.
GOLD MEETS THE TEST
The Federal Reserve Bank of the United States was established in 1913. At that time the U.S. dollar was fully convertible into gold at a rate of twenty ($20.67) dollars to the ounce. You could exchange paper currency of twenty dollars for one ounce of gold in coin form. The coins were minted by the U.S. government. Gold in other forms (dust, flakes, nuggets, etc) also had circulated as money at the same ratio of twenty dollars to the ounce once its purity and weight was established.
Fast forward one hundred years. The U.S. dollar has lost 99% of its purchasing power over the last century. In other words, it takes one hundred dollars to buy today what one dollar would buy a hundred years ago. Whereas one ounce of gold will still buy today what it would a hundred years ago.
GOLD IS MONEY; STOCKS ARE INVESTMENTS
Astute readers will likely be quick to point out that stocks or real estate have appreciated considerably more in U.S. dollars than gold over that same time period. And they would be correct. But that entirely misses the point of this article – gold is real money. The U.S. dollar is a substitute for real money; stocks and real estate are investments.
When someone states that “gold is too volatile to be used as money” they are being perfectly logical – in reverse. It is the U.S. dollar that is volatile and which continues to depreciate in value. Gold is the constant.
Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!