As gold fell this appeared on Reuters courtesy of Felix Salmon: “It’s important that goldbugs are seen to not only have silly beliefs, but also to have lost a substantial amount of money. Gold is a fear trade rather than a greed trade — it’s defensive, and defensive investors are always particularly loss-averse. If you lose money betting on high-flying tech stocks, that’s much more likely to be money you can afford to lose than if you lose money after putting your life savings into precious metals.”
The mainstream media mob have a three-pronged pitch fork especially for attacks on gold, which they regularly like to wield about.
The first prong is the intelligence insult prong, which was recently used by Paul Krugman who wrote back in April that he hopes ‘the gold price crash will finally bring intellectual capitulation.’ Implying that those of you who have invested in gold went into the process completely blind and misinformed.
The second prong is that gold is in a bubble and the bubble has now burst continue much to their delight. Gold was clearly never in a bubble. A bubbles requires mass participation and enthusiasm an asset, combined with the use of lots of leverage. Gold does not fit this bill – only representing 1% of global and financial assets and seldom held with leverage.
The third prong claims gold is only a fear trade and that the recent fall in the gold price shows investors are now feeling more confident about the economy and feel more wary about gold. Iza Kaminska recently wrote in the FT that it is becoming ‘ever harder to justify a role for gold’ given that the commodity landscape has now been reset.
2. Don’t listen to predictions
Speaking of the media, no-one loves a price prediction like they do. But the gold price is rarely what gold investment is all about.
Those who invest in gold, rarely do it because they see the price hitting $10,000 an ounce, but rather because they see central banks and governments making poor economic decisions which will drive the value of sovereign currencies down and therefore the gold price to new highs.
Full-time gold commentators, who have a fully vested interest in gold rarely review or amend their predictions. Few place timescales on what will happen to the gold price.Jim Sinclair who recently predicted prices of $3,500 gave no timescale of when this would happen, instead looking at debt levels and ensuing currency wars which will make way for the gold price to fly.
But of course we don’t hear about legends’, such as Mr Sinclair, predictions instead we hear about those from the likes of Goldman Sachs who right before the gold crash told clients to short gold.
Similar institutions continue to adjust, amend and scrap their gold price predictions according to short-medium term developments in the market such as stock market performances and employment numbers. They rarely regard the impact of long-term monetary easing on the confidence of those with cash in the bank. Hence why gold price predictions from high-finance are so often wrong – see this graph from Casey Research for the smoking gun.
3. Watch the fundamentals
What are the fundamentals? They’re the same ones that the mainstream media ignore. So when financial journalists are decrying the end of gold because of strong performance in the stock market or the dollar’s strength, a happy goldbug checks behind the curtain to make sure the banks are still printing money, negative interest rates haven’t been amended, central banks continue to buy gold etc.
To help you keep an eye on the fundamentals, ask yourself the following questions:
- Has confidence returned to the financial and monetary systems?
- Are there more or less EU countries heading for financial difficulties?
- Is the Fed still pumping money and do they have a solution on repaying their debt?
- Are central banks still printing money and devaluing currencies?
- Is easy monetary policy likely to continue?
- Are real interest rates positive?
- Are central banks still buying gold?
- Are individuals across the world still buying gold?
4. Don’t speculate but instead preserve wealth
Gold bugs do not invest in gold if they’re looking to play the market, make a quick profit and take a bit of a gamble. Those looking to own gold do so as it is money which will holds its value in the future.
The unique properties of physical gold mean that it will never be completely valueless. Those who have been speculating are those who have felt the pain of the gold price drop (and are the cause of it) but those who have hung onto their physical gold have felt neither pain nor jubilation. The amount of gold in their possession has not diminished, it is only those who speculate on paper gold who would question its price.
The drive in gold prices in the last decade will be supported by the physical gold buying and hoarding which has taken place. Speculating with gold suggests that investors buy gold in the hope of being able to sell it for much more paper currency than the amount that originally bought it. Those who preserve their wealth in gold do not hope to buy more paper, they have opted for a different (superior?) currency.
5. Ignore the price
This is something we talk about a lot on the Research Desk. When we discuss the gold price this is not the same as the value of gold. This, as we said above, remains the same.
However when we talk about the price of gold, we should instead be thinking about currencies priced in gold. You don’t even need to work it out to know that when priced in gold, currencies have plummeted in price. This week the Bank of England advisor, Charlie Bean reported that the value of the British Pound, against other currencies has fallen by 25% in the last five years. Against gold the British pound has fallen by over 90%, other major currencies have had a similar experience.
So whilst the price of gold in US dollars, British Pounds and the Indian Rupee, to name a few, has fallen slightly in the last month this is nothing in comparison to the fall of the sovereign currencies’ value against gold.
5 simple steps…
So rather than fretting about the gold price as bemoaned by the mainstream media, don’t look at short-term predictions, they’re short-sighted and rarely look at the fundamentals. The same fundamentals which affect the value of currencies, and not the value of gold.
Gold bullion is a unique savings vehicle and possibly the most divisive asset in finance. As such there is a never ending media circus around the gold market which can be distracting and stop people buying gold for the wrong reasons.
We hope these 5 key points help you find clarity amidst the talking head’s sound bites, Western central bank propaganda and general misinformation.
This article is brought to you courtesy of Jan Skoyles from The Real Asset Co.