April 15, 2013
Somewhere, Paul Krugman is smiling.
The Nobel Prize winning economist, whose brilliant ideas include:
- spending your way out of recession
- borrowing your way out of debt
- conjuring unprecedented amounts of currency out of thin air without consequence
- staging a false flag alien invasion of planet Earth
is perhaps most famous in certain circles for calling gold a “barbarous relic“. He also recently suggested that Europe’s failing euro monetary union is the modern day equivalent of the gold standard. I’m told he was completely sober when he said this.
Of course, Krugman is smiling right now because he thinks that he’s been proven right. Gold’s massive sell-off over the last few days has shaved over $200 from the metal’s nominal price… a steep move any way you look at it.
And as Krugman has been saying, ‘gold is not a safe investment.’ But that’s because he fails to understand the fundamental premise of gold.
Gold is, in fact, a terrible investment. It’s an even worse speculation. But let’s look at what those actually mean–
When you ‘invest’, you risk a portion of your savings, typically for several years, hoping for a nominal gain when denominated in paper currency. You buy for $1,000 and you sell for $2,000.
‘Speculating‘ involves taking much higher risk, often for shorter periods of time with a smaller percentage of your portfolio, hoping for outsized nominal gains when denominated in paper currency. You buy for $100 and you sell for $2,000. But you could easily lose everything.
Well, gold makes for a really bad speculation. Like almost any real asset, it can’t really go to zero. It’s physical. It’s real. It’s always going to be worth something. And for physical gold, there’s very little leverage available.
Gold makes for a bad investment too… because in either case, the price of gold tends to rise and fall over the long-term with inflation and inflation expectations. If it’s leading (or keeping pace with) inflation, then you can’t expect much of an inflation-adjusted return.
But these reasons for buying gold miss the point.
Gold is a proxy against the financial system. It’s a way to withdraw savings from a corrupt fiat currency and hold something that cannot be conjured out of thin air by a tiny banking elite. We don’t buy gold hoping to sell it down the road for even more paper currency.
This is the same reason why I’m buying so much agricultural property in South America… it’s controlled by nature, not by men. Plus, I get paid huge dividends by way of organic fruit.
If you look at the fundamentals briefly, gold had a major sell-off this morning in part because the Chinese reported poor economic data. In addition there was Friday’s pitiful consumer numbers in the Land of the Free.
- poor economic data still abounding from the US to China…
- massive, debilitating debt still accumulating…
- Europe still completely bust..
- Japan promising unprecedented money printing in an era already marked by unprecedented money printing…
… what will the general trend be? Will central bankers around the world continue printing money?
It certainly seems likely. If they stop printing, interest rates surge… and nearly every government in the developed word will go bankrupt. That’s a big incentive to bankers.
With this in mind, while the gold correction probably has quite some time to play out, the long-term trend is obvious.