The Truth About Gold

The gold market today is full of people beaten down and demoralized. Many bought gold on predictions of inflation that would cause their cash savings to evaporate into thin air. Others have been waiting for a coming crash in the bond market that would push huge pools of money out of the so called “safe haven” of the US dollar and into real assets, more specifically gold, causing an unprecedented rise in its price. As we can see once again the two drivers of fear and greed have been behind the very volatile market. Regardless of the reason, if the person bought on speculation of a higher price in terms of dollars, they have been spectacularly wrong since the bull market broke down in September of 2011 and many now are ready to throw in the towel. I do not discount the predictions that I mentioned above and they very well may come about. I would only like to point out that if you are feeling depressed about your gold allocations performance throughout the last couple years, there is a good chance that you had the wrong notion of buying gold in the first place.

Let me start off by saying that I am a BIG fan of gold. I’m sure that to most people it sounds completely insane for a person to love a shiny rock but I have a reason for my admiration. Since the dawn of man gold has been the best element to use as money. This can be proven rationally and empirically. Rationally though the recognition that the element of gold possesses certain characteristics (durability, portability, divisibility, intrinsic value) which just happen to best fit the bill for what money is (unit of exchange, unit of account, store of value). It can also be shown empirically by pointing out that gold has always been chosen as the preferred medium during instances throughout world history where there has been global trade without a currency being forced on the population. In other words, I love gold because it is the money of free people. It’s real, it’s tangible, it’s value will never fall to zero and it’s mostly untraceable. I want to be clear that I am not advocating for a gold standard. People should be able to choose whatever they would like to when trading with one another, it just so happens that this always turns out to be gold.

That being said, this does not mean that I think everyone should go rush out and spend all their money on gold. It is important to think clearly as to your intentions when putting a portion of your portfolio into something so as to not get burned as many are in the gold market today. I feel completely content with every once of gold that I have ever bought. I would like to point out the common misconceptions that have caused those that are upset to learn for their mistakes.

Gold is not an investment

I will start with the most widely held misconception first. Whenever you are considering “investing” there are several parameters that you should be looking at, first and foremost is cashflow or passive income. Cashflow is how much money the asset will put into your pocket on a monthly or quarterly basis. Obviously a gold coin does not produce monthly profits i.e. cashflow, therefore it is not an investment. If you are expecting price appreciation then you are not investing but speculating which is fine as long as you are prepared to lose the money that you are speculating with. You can invest in the gold market by buying gold mining stocks which pay a dividend, not by holding bullion. I think that it is a futile exercise to watch the price of gold but if you are determined to compare it’s price appreciation with other things than you should compare gold up against other currencies or forms of money.

Gold is not money

This may seem to be completely counterintuitive to what I wrote earlier but it is not. I said that gold is the money of free people, unfortunately this does not describe society today. We are all forced to use paper “fiat” currencies issued by the government for all taxes, debt and dues by legal tender laws. Also, the cult of John Maynard Keynes has convinced most of those working in the western financial markets that gold is a barbarous relic which deserves no attention in the modern economy. This is how the government has taken away the naturally chosen money of gold an replaced it with paper which they run off of a printing press. Through the insidious process of inflation and debasement of the currencies the governments of the world are able to fund their atrocities without directly taxing the population. What this means practically is that gold is not held by a majority of the population and is therefore very volatile and not a good store of value.

You should never leverage a speculation

Using leverage is a great resource for those that want to acquire a cashflowing asset but a horribly bad idea for those speculating in the market. If not calculating your financing in terms of ROI, you might as well be borrowing money to throw on a roulette table. Also, when leveraging up make sure to read the terms closely and only do so in a corporate entity so as to not be personally reliable if the odds go against you.

No one can predict the market

No matter how much of a sure thing it seems that an investment is, it’s not. There is no such thing as a sure thing and this is especially true in a market with unaccountable participants from all over the world. This does not mean that you should never look at market conditions and try to see if you can make some money, but only do so with money that you are prepared to lose. Market prediction is more of an art than a science and although there are many people out there that will convince you that they know which way the market is going, they don’t, no one does. For this reason having more than 1/4 of your assets in only one thing is never a good idea.

The bottom line

You should look at gold as your financial insurance. Just like a life insurance or medical insurance, gold is something that you should buy and hope that you never have to cash in. If you cash in your financial insurance it will be in a time that the majority of people are desperate for a stable unit of account which usually means it is a time of all around financial chaos. At a time like this what you do not want is a piece of paper laying claim to some gold on the other side of the world. You want physical bullion that you can put your hands on. The best way to hold gold is in secure places that you can access if times get rough, this could be P.O. Boxes or safes at property owned by you or your family members. Although you may be tempted to tell people about your stash it is not something that you want to advertise, keep the location of your gold to yourself and maybe one or two very close family members. You should spread out you holdings in different locations in different countries and for God sake don’t keep all of your gold in the United States. Buy it and forget about it, don’t check the daily spot price and don’t listen to gold brokers telling you to back up the truck because this time you can make a fortune. Make money in the way that you know how and sleep well at night knowing that no matter what happens in the markets you will never be completely wiped out.

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