This will surely create some controversy…. Add to that the conspiracy theories and certain stock market reports that use gold as the ultimate fear-axis to get attention, what you end up with is a lot of disillusioned and misled investors.
The only truth is the result.
If you only had one chart to wrap up what’s happening in global markets right now, it would be this one – The price of Gold.
Since a 2011 peak at around $1900 an ounce, the price of gold dipped… and then sank… and is now trading around $1300 an ounce, with every threat that it could be falling further.
That’s a 30% fall in less than two years.
The golden days of gold seem to have run their course. For a long while it could do no wrong, from a launching pad of around $250 an ounce before the turn of the millennium, it posted gains from pad to peak of over 600%.
And all this through the most ‘challenging’ of economic times – through the popping of the dot.com bubble, the Enron scandals, The Iraq wars, and even the GFC.
Gold was the thinking man’s safe haven of choice.
But not this year. Gold’s been on the skids since George Soros indicated in April that he thought that gold was no longer the safe haven it used to be, and the smart money was getting out. Then in October, Goldman Sachs’ head of commodities research said gold was a “slam dunk” sell and that it was headed for $1,050 an ounce.
(No, I don’t know what a ‘slam dunk’ sell is, but it sounds serious.)
But you still hear people saying that gold is a ‘safe investment’.
So let me spell it out loud and clear, in flashing neon lights…
GOLD IS NOT A SAFE INVESTMENT
First of all the idea that gold is ‘safe’ is ludicrous now. “Safe” investments are things like term deposits, that pay you a predictable amount of sod-all a year, with zero volatility.
“Safe” investments DO NOT fall by 30% in 18 months, or have volatile lurches in price every time Bernanke farts.
Secondly, as I’ve argued, gold is not really an ‘investment’. Not as I see it. Gold doesn’t pay you a return. There’s no rent or dividends.
If you’re buying gold, then you’re probably doing it for one of two reasons. The first is that you expect that the price will keep going up, and you’ll be able to sell it for more than you bought it. This isn’t gold investing, this is gold speculating.
But if you’re speculating then you’re completely at the mercy of the market. You’re “investment” is only worth as much as everyone thinks it’s worth, and if George Soros tells everyone that it’s not worth as much as they thought it was worth, then you take a hit.
The second reason people have bought gold, especially since the GFC and the launch of the Quantitative Easing era, is as a way to preserve wealth in the face of global economic calamity. If the economic system completely melts down, or even if we only have run away inflation, then gold offers you a way to preserve your wealth.
In this sense, it’s really just a shiny insurance policy.
But you know, I’ve never really understood this.
Let’s say a door-to-door sales comes to your house and offers to sell you zombie apocalypse insurance.
“If you pay us a certain fee, we promise to return your wealth to current levels, should there be a zombie apocalypse.”
There’s a few things you’ve got to ask yourself.
- How did this guy get past the security gate?
- How likely do I think a zombie apocalypse actually is?
- If there is a zombie apocalypse, is this guy actually going to be able do what he’s promising? If the world is actually taken over by brain-eating zombies, who’s going to give me my pay-out? What will a pay-out even be worth if I don’t own a shot gun?
Now, when it comes to gold, I think most people get to 2., but never make it to 3.
What’s the risk of total economic melt down? I’d actually have to say to me, it looks like an incredibly small risk. Our standards of living are built on the foundations that the current economic system survives and prospers. Everyone wants to see the game continue – from the vested interests of Wall Street, to the mums and dads of back street Australia.
So a bet that the economic system will fail is to bet against the ingenuity and endeavour of the entire human population. I’ve seen humans do some pretty crazy and amazing stuff. For my money, if we had to find a way to avoid economic ruin, I reckon we could. We have the social, political and technological will.
But more to the point, if the economic system did collapse, what would a piece of paper that said you owned a chunk of gold in a basement in London actually be worth? Who’s going to honour it?
If there’s total economic collapse then no one’s paying the police. There’s a break down in the rule of law. Even if you had it in your hands, would some one give you their last can of beans for it, if there was no food to be found?
My point is, when people buy gold to insure themselves against economic collapse, they forget that a post-collapse world would be fundamentally and radically different, and if that is what they’re worried about, a piece of paper that says they own some fairly useless metal isn’t going to save them.
And before you say I’m missing the point that QE is debasing the USD, and inflation is inevitable… if that’s your argument, look at the inflation data. 5 years into QE inflation is falling not rising.
Who knows how it’s going to end? It’s radical stuff. But there is nothing to say that it has to end in hyper-inflation. If there was such a certainty, then it would have been priced into the market already.
Nope, the gold boom was a gold bubble. The further we get from economic calamity, the more it will unwind.
So if you want to speculate, buy something else. If you want insurance, buy a shot-gun and a bunker of canned food.
And if you want to invest, buy property.
But you knew I’d say that, didn’t you?