Fool’s gold?

Adella and I were recently discussing what currency we’d use for our savings once we hopefully soon can start to accumulate a little. We talked about the practicalities of having a savings account denominated in euros, pounds, or gold (all of which it turns out are essentially impossible with U.S. banks). So right as we were doing that, my Mom forwards me an article from her broker out of the blue arguing against the continued rise of the price of gold.

It reminded me how, because of my prior involvement in online gold-based payment systems, there were a few years there where I would occasionally be asked whether I thought gold was a smart thing to buy. Why they asked me and not someone with actual money, I can’t say. But I remember always making the same two points:

  1. No matter how clever their analyses may seem, no one really knows what the price of gold is going to do.
  2. Anyone who tries to convince you that they really know what the price gold is going to do is at best mistaken and at worst trying to deceive you into buying something.

The author’s point about gold ETFs is a good one, but it’s not like mutual funds that track gold haven’t existed before that, or just stocks like Freeport MacMoRan.

Moreover, if I had to guess, I’d say that the combination of a growing middle class in India, China, Malaysia, and elsewhere, where there’s a strong cultural inclination toward gold as a store of value, combined with the inflation I expect we’ll be seeing here in the U.S. for some time to come, means that $1,000 will not be some sort of magic ceiling for gold.

But then, that’s just my guess. See point number one. Besides, I’m neither licensed nor qualified to give financial advice.

3 Replies to “Fool’s gold?”

  1. Mr. Anderson cites Econ 101 in his analysis. Such a pity that he apparently completed his Social Sciences requirement with something other than Econ 102, where they teach you to account for inflation.

    The Find utility in my copy of Adobe Acrobat Reader cannot find the word “inflation” in Mr. Anderson’s letter. His analysis tacitly assumes a 0% inflation rate. Using the increase of the broadest measure of the money supply — what would be M3, if it still were reported — inflation is cooking along at about 15% right now.

    $1,000 per ounce / 1.15 = $870 per ounce

    Inflation alone accounts for a lot of the run-up in the price of gold in the past year. This calculation is a gross over-simplification, but significantly less misleading than Mr. Anderson’s analysis.

    An interesting experiment would be to see where the price of gold is a year from now, compare it to Mr. Anderson’s assessment of the gold market, and follow up with him.

    Who knows? Maybe he is right.

    On the other hand, if we assume that the current real price is our best estimate of the future real price, then I’d be willing to wager that the nominal price of an ounce of gold will top $1,100 by the end of 2008.

    There. We have a testable hypothesis. I say up, and he says down.

    The reader can keep score in real time here.

    Mr. Anderson’s closing comment is very telling. “But I abhor the waste of resources, bad labor conditions and the significant hit on the environment associated with digging gold out of the ground, only to turn around and put it back in the ground as bars in vaults.”

    By that logic, he should abhor the consumption of food, given what it becomes within a day or so of being eaten.

    Fortunately for the rest of us, markets are not run to appease the sense of esthetics of mystics and environmentalists.

  2. Hi Steve, Hallam from Civic here wandering onto your blog. Just recently I have been thinking about gold although I don’t have money nor money to throw away. The ETF seemed interesting based on some research. Are you into researching gold or any other investments. If gold isnt fairly safe then what is?

  3. Hi, Hallam. No, I haven’t really been researching this. I have distressingly little reason to do so, if you take my meaning. If I did have the money to invest in something, I’d probably use it to build a house on Adella’s family’s land in Dominica so that we’re mortgage-free once we return there for good.

    As for whether gold is really a good investment, I’ll stick to what I said before: no one knows, and those who say they do probably have something to sell you. That’s not my definition of “safe”, but then I don’t know what would be safe in these chaotic times.

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