Gold is Not A Good "Investment"

February 21, 2004

Gold is a lot of things to a lot of people.

To some, it is a threat. To some, it is a "trade". To some others, it is an "investment." And to yet others, it is a store of value, and - oh yeah - some people look at it as a currency, too.

The funny thing is that all of these are correct. Gold is indeed all of the above - but the question is: which function does it fulfill best?

We do know from history that gold has always been the ultimate store of value. We also know that gold has fulfilled its role as currency in a most admirable way - whenever it is allowed to do so without under or overvaluing it, and without government/banker interference.

We also know that gold is a most formidable threat to those who want to cement their power and control over populations by monopolizing the issuance of currency without full accountability to free-market principles.

But what we do not realize is that, as an "investment," gold absolutely sucks.

That may sound like a strange statement coming from me, a vocal gold-advocate. Maybe I am following the lead of Al Greenspan and have completely sold out for a few perks and a little bit of status and some power?

No. Sorry. Nobody has offered me any perks, nor status, nor any kind of power.

I haven't changed my mind on gold, either. I am still as pro-gold, pro-precious metals, and pro-freedom as I ever was. It's just that I have realized that gold is not a good "investment". And that is so not because there is something wrong with gold, but because there is something wrong with whatever it is you get back when you sell your gold "investment."

What do we do when we "invest"?

We exchange some paper (or computer-blip) cash for something else, and then we wait, in the hope that the demand for whatever it is that we bought with our paper will increase over time, or that a supply shortage will happen, or that some other event, like maybe a currency depreciation or planned devaluation will happen, so that we can then, at an opportune time, exchange our "investment" back into cash and make what we normally refer to as a "profit."

Profits are great, don't get me wrong. Everybody wants to make a profit - but what are we really doing here?

The focus of an "investment" is never the thing itself. The thing itself is just a medium, a vehicle for a (hopefully) bigger "return", of whatever we have put into it, at some time in the future. Maybe our return will be ten, twenty, fifty, even one hundred percent. We might even triple or quintuple our initial outlay in the process.

If that ever happens, we hold our heads up high and tell our friends and anyone who can't run fast enough at a dinner party that we "made a killing" on such-and-such in the blankedy-blank market.

But, in the end, we still want the cash. And that's okay. Nothing wrong with that in principle.

The problem is only that, if cash is no longer "king" because

  • when your country's currency is rapidly declining in value compared to other currencies,
  • and when it is the currency of "the" country that consumes everybody else's products, and for that reason cannot be tolerated by everybody else to so decline in value,

then your hoped-for cash-winnings can run into a bit of a challenge.

This problem gets especially protracted when your currency is also considered the reserve currency of the world, the one the other countries use to underpin their own issues. In that case, a falling value makes these other countries less likely to want to hold your currency on reserve.

Instead, since there is now an alternative, the euro, they prefer to exchange whatever amount of their reserves they can to the new euro currency that has no debt load and is not burdened by a trade and current account deficit like the US is.

This desire to hold euro instead of dollars is tempered by only two things, really:

  • They still need dollars to buy oil and most other goods on the international markets, and
  • If they export to the US, they cannot allow the dollar to fall too low, or they will lose their ability to get US consumers to buy their products, since a falling dollar makes foreign goods too expensive for Americans.

So particularly the Asian exporters like China, Japan, South Korea, Singapore, Malaysia, etc., are in a difficult situation. The whole world is moving toward the euro, and so are they, but the falling dollar makes it necessary for them to buy dollars and US treasuries to keep their own currencies from rising against the currency of their number one export market.

This creates the well-known phenomenon of "competitive devaluation". Even the EU will at some point be forced to join this game.

What is most significant is that the US itself, for purely structural reasons, currently actually likes it when the dollar drops. The US hopes its own exports will thereby become more attractive, cranking up manufacturing at home, and - hopefully - produce some job growth in the process, and better soon!

The problem: despite the rapid depreciation of the dollar since September, the current account deficit has not contracted. December's figures blew way past what the "experts" predicted ($42 billion, instead of 38, as they thought)

When will this process of competitive devaluations end?

Answer: When it's convenient for the US to support its own currency again.

And when will that be? When the US economy gets strong enough so that it can hold its own and produce jobs in sufficient numbers without a protracted, artificially low interest rate regime.

No sooner, and no later.

The trillion dollar question is: will that moment ever come, and if so, will it come in time?

In other words, is there any chance at all that this can occur before the dollar drops so low that prices start rising so fast and so obviously at homethat even the most carefully massaged domestic CPI numbers will no longer keep Americans carelessly borrowing and spending (and stock-buying) like there's no tomorrow.

The next trillion dollar question is: Even IF that moment comes in time, will it help at all with the US trade and current account imbalance? It doesn't look like it will. If the economy starts adding jobs and Greenspan can raise rates a bit, the dollar will get stronger, which means Americans will buy even more foreign stuff and rack up an even higher deficit. Problems, problems.

Sorry for the detour.

The point of all this is: gold-advocates all share a very dim view of these matters, and of the US' ability to eventually extricate itself from the past decades and decades of rigging and brow-beating of free markets.

So, from that vantage point, the question is: will the dollar ever recover? Will any currency be able to extricate itself from this web of competitive devaluations?

If your answer is "yes" - what are you doing looking at gold? Go and invest in stocks, instead.

If your answer is "no" - what are you doing "investing" in gold - for cash??

What are gold-advocates doing investing in gold, or even worse, trading in gold, when all they will get out of it is what they already know will soon be worth less?

Cash is trash. If you're angling for cash, you are asking to crash. (Do I sound like Dr. Seuss?)

If you "invest" (medium to long term) in gold, you'll get back trash.

If you "trade" (short term) in gold, you'll get back what soon will be trash.

Only if you buy and hold physical gold will you get value in exchange for trash.

Which one is the better bargain?

Yes, of course, cash is what we pay our bills with, so we all need it. But accumulating physical gold is the absolute best way to deal with the current (and future) situation. All currencies will depreciate against gold.

You work to make money. You spend what you need to spend, and the rest you use to buy gold. Do this every month, from now on. When you lose your job or need to liquidate some gold because you don't have enough trash to buy whatever you need in the future, liquidate only what you need, and keep building your "hoard" whenever you can.

By all means, buy some good gold and silver stocks, too - especially of companies that keep metal on reserve instead of cash. Maybe invest in a gold ETF. But make physical your mainstay. That way, you build value. If you don't trade gold, you deprive the enemies of gold of their number-one weapon.

And, what's more, you don't get wobbly knees every time gold dips a bit because some CB official somewhere is spitting hot air at the markets.

Currencies are in a downward spiral; even the "strong ones" will eventually follow. The dollar is no longer as pivotal to the world monetary system as it once was only a few years ago. Because of that, gold is no longer as "repressed" as it once was. It is still being "managed", to be sure, but the direction is now slowly upwards. It is no longer being suppressed at all costs.

That's why gold is not an "investment". It needs to be held for its own sake, not to make a stash of trash.

A suggestion: if your fingers are itchy, and you just have to trade something because it's so exciting, trade stocks. That way, at least you won't play into the hands of the bullion and central banks in their attempts to make gold look like trash - for the time being.

Then, if you're lucky and win in the stock-trading casino, take your winnings off the table and put them into gold. Physical gold, that is. But, when it comes to gold itself, the best advice is:

Don't trade it.

Don't "invest" in it.

Just buy it!

Got gold?


Alex Wallenwein
Editor, Publisher
Helping investors prepare for and survive the during the ongoing dollar-collapse - and prosper in spite of it.
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The first use of gold as money occurred around 700 B.C., when Lydian merchants (western Turkey) produced the first coins