When I’m investing, my goal is for my wealth to increase. How can buying gold accomplish this? I can invest in stock in a company, and when that company makes some product, they’re producing wealth, of which I get some share. I can invest in land, which can become more valuable if I grow crops on it, or build something on it, or even if someone else builds something on other land nearby. I can invest in an education, which will make my skills more valuable, and so increase my wealth that way. I can invest in a bank account, in which case the bank will use my money to make the above investments and others, and give me a share of the increased wealth in interest. But if I buy gold, none of that happens: The wealth associated with a gram of gold doesn’t change.
I work for a major discount brokerage firm and I talk to quite a few gold bugs. Every conversation is at least a 30 minute right wing/conspiracy nutcase rant. An incoherent combination of birther, tea party, Armageddon, and socialism nonsense.
Take a look at the commentary that some of these nuts often add to news stories reporting the price of gold:
You’re saying no one has ever increased their personal wealth on the commodities market? There are entire firms which generate tons of wealth through commodities brokerage. Commodities have intrinsic value, and wealth can be generated by shrewd investors who buy commodities at a given price and sell it at a profit.
This is a misunderstanding of the process. Value of an investment increases because people want to pay more money to purchase it than you did originally. If people want to pay more money for gold next year than this year it is no different than if people want to pay more money for your house next year than this year. In both cases it is the entire external economy that has changed its perception of value.
Whether the increase is “real” or not doesn’t matter in the least. Many companies have stock that increases based on investors’ judgments (or blind guesses) on what it will be worth in the future. Commodities have prices that depend on peoples’ guesses about scarcity and demand in the future. Collectibles go up and down by whims of the culture. All of these are equal in status to the supposed gains of creating a product or growing a crop. Neither of these is wealth. They only provide value if someone is willing to pay for them, and only give profit if someone is willing to pay more than they cost to produce. Wealth is an intangible just as value is. Both apply to gold in the same way they apply to everything in an economy.
In a practical sense this is correct. With few exceptions gold likes to revert to it’s elemental state, but gold is far from inert. It does form oxides. In fact the tendency of gold to lose the oxygen makes it a great candidate as an oxidation catalyst. I have seen it used to make epoxides. Gold coordinates well with sulfur and cyanide and there are many gold compounds available for purchase.
Liddy still pushes gold all the time. He also has ads for “live longer with these secret miracle vitamins” type things, I think. But mostly I want to know how he was able to use the instrumental riff of Crash Into Me by the Dave Matthews Band for his filler music. I can’t imagine Dave allowing Liddy to use his music.
I think you’re misinterpreting Airman Doors’s point. Yes, people can take a bath in gold investments, because the value of gold does fluctuate greatly short-term as the “contrarian” investment, the hedge against falling stock prices. When specvulative investments go down, gold goes up, and contrariwise.
But long-term it’s been on a steady increase in value since we went off the gold standard. This does not mean short-term fluctuations, some of them extreme, don’t exist – it means if you bought gold in, say, 1978 (date picked at random) and held it until today, there has been a steady long-term increate in value, in terms of what your investment would bring.
In some ways, it’s like ‘global warming’ – the past behavior and forecast is for a moderate steady overall rise; selected contrary short-term examples do not disprove this long-term phenomenon.
I think that this is only sort of true. Here is a chart of the actual and inflation-adjusted gold price from 1968-2006. Yes, it’s gone up, but not by very much, and certainly not much compared to the S&P 500 Index.
According to The Economist, the latest ratchet upward in the price of gold was driven by a large purchase by the Indian central bank, which wanted to reduce its exposure to dollar-denominated assets. This has prompted hope or fear, depending on your point of view, that the Chinese central bank will follow suit.
If you can say this then it’s equally true that the stock market never goes down in value. And neither does real estate. And just about everything else.
That makes the statement essentially meaningless. Gold does fluctuate in value and gold is not a safe investment and is not safer than the stock market. That negates the entirety of what Airman Doors said. In the long term we are all dead. Your investments have to pay off in your lifetime. Gold hasn’t in real terms.
Goldbugs are conspiacy theorist loons. There’s nothing you can do to change that.
Let’s do the comparison. One dollar invested in the S&P 500 in January 1, 1978 would be worth $24.60 in Dec 31, 2008. Cite. Note that I picked an endpoint during one of the worst bear markets of the post-war era.
An oz of gold was worth about $170 on Jan 1, 1978 and $875 at the end of 2008, coming off of the worst post-war financial crisis when gold should be worth zillions. Dividing, $1 of gold bought in the beginning translates to $5.14 now.
5.14 << 24.60.
Hey, gold might be a terrific investment going forward. But it sure has been a dud in the past.
What do baseball cards, art and gold have in common? They’re really really cool
I would expect gold to have lower returns over the long run. Like art, people like to hold the shiny metal, while investing in x share in Big Corp is boring. So they have to pay a premium for it, translating into lower returns. Add in conspiracy fantasies and gold’s allure becomes overwhelming.
I was using the small letters in a more general sense and not in terms of political leanings. Capital “C” conservatives I’ve known (we sell a lot of bullion at work) tend to be in and out of everything depending on what’s hot or what’s being recommended as the next hot thing. Not based on any cite but the people who keep cashing in one with us to buy the other and then the opposite months (or years) later.
I said wealth, not value. Yes, people have made money on the commodities market, but then, people have made money on the lottery, too. With land that gets developed, or stock in companies that produce something, or the like, the thing you’re buying is actually changing, and thereby driving the change in price of it. With gold, though, the gold itself doesn’t change, so changes in the price are due entirely to inherently unpredictable fluctuations, and trying to buy when it fluctuates low and sell when it fluctuates high is just gambling.
Maybe I’ve done some work on my house, re-painting it, replacing the roof, or whatever, to give it a reason to be worth more. But even if I sell my house in exactly the same condition as when I bought it, I’m still coming out ahead on my investment, since I’ve had however many years of a roof over my head (or however many years of tenants paying me rent, if I’m not living there). Gold doesn’t keep the rain out.
Changes in the value of any investment, other than those due solely to the passage of time (as for example, a bond approaching maturity), are due to inherently unpredictable fluctuations. Predictable events are already factored into the price.
The conventional difference between a “gamble” and an “investment” is that investors seek compensation for assuming risk, whereas gamblers don’t. Gamblers pay for the “privilege” of assuming risk. Investments can be extremely speculative (penny stocks, options on commodity futures), and can easily tumble to zero value, but if the investor’s a priori expected rate of return correlates positively with volatility, they’re investments nonetheless.
Of course not. Gold isn’t supposed to keep out rain. It sucks as a building material. It has different uses–decoration, filling teeth. So what?
Like real estate, and like all commodities, gold has both consumption and investment uses. Some people buy corn futures because they want to make corn syrup next fall; some buy them as a speculative investment. Likewise with gold.
You may or may not like gold, or think it’s a good investment, but to deny that it’s an investment at all is fatuous and flies in the face of hundreds of years of financial theory and every financial textbook ever written, anywhere.
OK, if I buy gold for the purpose of decorating something, and get whatever value there is in having that thing decorated for a few years before selling it, then I could justify calling it an investment. But I suspect that most people who “invest” in gold just lock it away in a vault somewhere, or even pay someone else to lock it away in their vault somewhere, and so get no utility out of it while they own it.
And you could buy a stock that never once paid dividends. That, too, would get you no utility out of it.
As pointed out above, many people buy stocks for their capital appreciation, not any earnings the stock may generate. They can’t live under their stock certificates. But they are investments, just as commodities are.
You’re trying to define the word investment in your own way, and welcome to do so, but in the world of finance, it is a universally-accepted fact that gold counts as an investment.
As an investment, gold (or gold certificates) have a property that offsets its high volatility and low long-run returns. It might be negatively correlated with the stock market, such that it “zigs” when the stock market “zags”. In the technical parlance it may have a negative beta. (The paper below attacks this hypothesis, but it at least finds that gold is a near-zero beta asset.)
For those interested in investing in gold… I’d recommend other investments. But if you’re really really adamant, you should at least read about its properties from someone other than a salesman or political commentator, right? Here’s a link: !PDF! : deepblue.lib.umich.edu/bitstream/2027.42/63919/1/fei_fan_2009.pdf
The author characterizes gold as just another foreign currency, albeit one that doesn’t pay interest.
Hmm. Am I more right wing than I thought? I rarely watch or listen to right-wing media, given that my time on earth is finite, but still seem to hear a lot of gold ads, particularly on Air America. I’ve been buying gold like crazy over the past two years, but stopped buying and have gradually sold off half of my holdings over the past few months.
In my view, gold doesn’t change value at all – it’s like a physical constant, and everything else changes value relative to it. So, crazy gyrations in the price of gold are actually crazy gyrations in the value of the dolllar. But that’s MHO and this is GQ.
Do you really think this is a right vs left distinction? I never thought of the left as anti-business; more that at the core, we believe the tax rules shouldn’t rob the poor to subsidize the rich and that it’s okay to spend money on social welfare programs. (Having a safety net isn’t a right; it’s just that, as a prosperous country, it’s rather selfish of us if we don’t use some of that prosperity to help the less fortunate among us.)
The marketing of gold on AM radio in general and talk radio in particular doesn’t seem to be a right wing thing at all to me. If you listen to Randi Rhodes or Rush Limbaugh or even Kim Komando’s tech talk show, they all sell gold. I used to listen to a lot of talk radio at my last job and the commonality of the advertisers across the spectrum is surprising.
I think that the gold marketeers must have some demographic info that leads them to believe that the talk radio audience is a good target for them. It doesn’t seem to matter if the show is right, left, or neutral in format.
And he hits “post” and all the Google ads on the SDMB switch to selling gold! I love it.
You could make silver your numéraire as well. Or oil. Or wheat. Or pork bellies.
And there are some very specific things that can affect the price of gold such as the central bank of England and other countries selling off a big chunk of their holdings in the 1990s or manipulation by Russia mining interests. Lots of these factors have little to do with the strength or buying power of US currency.