Why gold is a bad investment

And here's the graph

http://goldstocksdaily.com/wp-content/uploads/2010/06/au3650nyb.jpg

Why not just look at gold as a trade. The fact is that many people do view it as a currency of last resort and buy it as protection against fiat currency. Doesn't really matter what "you" think, fact is it trades and it's value rises and falls with the fear index. Don't fight it, love it, trade it...wear it. (;

Here's another graph:

http://www.ritholtz.com/blog/2008/12/classic-case-shiller-hosuing-price-chart-updated/

Enjoy gold while you can.

" it is worth only what people are willing to pay for it"

Wow, I'm amazed at what I can learn on this site everyday

It that's your comment, JM, it proves you didn't learn anything. What it means is that it has no intrinsic value - you can't do anything with it. Therefore, its value is purely psychological, not economic.

Don't be so hard on JuiceMan, he did learn but he was just diagnosed by aboutready as having anger issues:

aboutspready http://streeteasy.com/nyc/talk/discussion/23685-keep-an-eye-out-401-east-60th-st-apt4abc?page=2
about 12 hours ago
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interesting juiceman, i never quite thought of you from that perspective. but obviously you have anger issues. I know because I have a Bachelor's degree in psychology from Yale that the taxpayers paid for. I also haven't been in the workforce for more than 20 years. My husband's father died this summer and I continued vacationing on Rome because it was a month since my prior vacation. I grew up in a trailer trash environment and I hate my late father and I'm willing to talk about that on streeteasy. You readers are responsible for my child's asthma and my mother's cancer. I repost streeteasy articles on another real estate blog site, but when it comes to the purity of streeteasy, I'm out with my fangs and long nails to keep it pure. I have a market rate lease but I still want to sue my landlord and get treble damages. I sold my apartment 3 years before the market peak so I still want to make fun of anyone selling today who might still have made more money than me by holding until today and not having to pay rent. I do nothing all day, don't volunteer for anyone, don't do anything productive, don't support my husband, and frequently remind my husband that I own half of his degree. Oh, and farewell. Please make a big deal of me leaving. Because I won't be back. Really.

I shouldn't misrepresent, this is what aboutready actually said about JuiceMan's anger:

aboutready http://streeteasy.com/nyc/talk/discussion/23685-keep-an-eye-out-401-east-60th-st-apt4abc?page=2
about 13 hours ago
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Juice, i haven't been selling a thing. not here. haven't been trying, not at all.

but maybe you have some evidence of same?

aboutready
about 13 hours ago
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interesting juiceman, i never quite thought of you from that perspective. but obviously you have anger issues.

Sort of like cabbage patch kids, baseball cards, and diamonds? Right steve?

How about beanie babies, cotton, and Tide laundry detergent?

'...enjoy gold while you can...'

Weren't you the guy who advised everyone NOT to buy gold three or so years ago on streeteasy threads? That it was an unwise, foolish investment?

If gold drops to 1200 (which it very well may), I will enjoy having only doubled my money. I guess if gold suddenly crashes from here to 900 in one day (stranger things have happened), I will have only earned a 50% return on my money over the past four years.

I can enjoy that. You can enjoy your crickets. At least you can eat them if you're (really) hungry.

For those of you who haven't read it, this a classic (and fun to breeze through) streeteasy thread on gold from two years ago, featuring stevejhx and a cast of other characters...

It's just a trade. Yep, isn't that what we treated re like? What'd that get us.

But for all u goldbuggers (fd, my wife has commodities in her 403b), you have NASA risk. The risk NASA finds two feet below a moon crater that there is 5 billiOn pounds of gold. Dont even know where you risk lies.

"cabbage patch kids, baseball cards"

Yes.

"diamonds"

No. Diamonds have very important industrial uses.

"beanie babies"

Yes.

"cotton"

Ditto industrial uses, though there are substitute products.

"and Tide laundry detergent"

Ditto a use (household), but there are substitute products.

Which is why P&G is so successful, and "investors" in gold haven't been over time: P&G uses Monte Carlo simulations to determine supply & demand; gold "investors" like it because it's shiny.

w67, you don't even have to go to the moon: there's enough gold in the Federal Reserve Bank of New York's vault to drive the price to $1 an ounce, if they wanted to.

MJones - you can repeat your argument for every bubble in history, from tulips to dot.com to housing. Eventually, they deflate.

FYI matson, most ppl lost 50% per year on their 2004/2009 nyc re homes based on their leverage and downpayment, and I can guarantee you for most ppl their 'home' dwarfs any gold position they may have. So your hypothetical 100% return sounds great until .........

One other thing, on my commercial investments since 1995, i make 350% on a cash on cash basis.... and I'm a young retired dude. So I guess what I am saying is until your gold starts shitting little pellets of gold and you can go pay your groceries wit it........

To the moon Alice!

Gold's been the best investment over the past 10 years!
It's comical how STEVEJHX even attempt to down play gold.

You've been recommending folks short gold over the past 5 years.
Where that get you?

No no no. Re levered 20x with tax break over the last 10 yes was the best ever in your life, but only if you sold and went cash in 2007.

Love reading JuiceMan from years ago, and his alter-ego, the spunkster:

JuiceMan
about 3 years ago

Bull. Q3 was MUCH tighter than Q4. Not even a question. Lining up a mortgage means squat. Closing is all that matters. Face it, the doomers were wrong.

spunky

aboutready yes you are right we are in a disaster period. Soup lines forming in Manhattan, Banks closing, Brokers jumping out the window, lay offs mounting, credit crisis is exploding to unimaginable proportions . Yes your wish of declining apt housing will come as soon as today

So I guess, according to steve, if something has industrial uses than it has intrinsic value.

http://geology.com/minerals/gold/uses-of-gold.shtml

Looks like gold has intrinsic value after all. Steve, do you research anything before you post?

Juicy, the amount of gold used in teeth exceeds all the gold used in electronics, its only other industrial use, where normally it is replaced with copper.

Jewelry, in case you don't know, isn't an "industrial use," and no one needs it. Platinum, also used in jewelry, does have industrial uses, mostly in catalytic converters.

It's not just me who says that gold has no intrinsic value - Warren Buffett himself says it. Your attempt to convince me that jewelry is important isn't quite going to cut it.

You were the one that said no intrinsic value not me.

The quote is from the article, Juicy, but I agree with it - there aren't enough industrial applications for gold to make it worth anything, as opposed to copper, palladium, etc. Check it out for yourself somewhere that you will understand: wiki:

http://en.wikipedia.org/wiki/Palladium

Gold has no such use. Most of it is used in jewelry:

http://en.wikipedia.org/wiki/Gold

Its use as a "store of value" is easily disproved by looking at its inflation-adjusted price over long periods of time: its price does not even keep up with inflation.

The problem with gold is precisely why it's good in jewelry: it's virtually inert, and can't even be dissolved by most acids. If it's inert, it can't be used in industry.

The uses of gold in electronics is limited - copper and silver, more abundant, are better conductors. And brass is just as shiny and almost as resistant to tarnishing as gold, which is why churches now make their implements out of brass, not gold.

Sorry. The gold bug is overhyped.

I like gold..........it's shiny.

It's also the Armageddon bet.
The bet that everything is going to hell.

Face it. Gold is a prudent part of one's assets. It should be 5-10% of most portfolios.

"The bet that everything is going to hell."

Nope - you can't eat it. Crickets.

"Gold is a prudent part of one's assets"

Fool's gold.

You people have no clue what your talking about. Gold is the BEST investment youc an buy. The guy in the Goldline commercial on Fox News said so. And if that is not enough, Glenn Beck also said that you should buy gold!

Gold has out perform every asset class over the past 10 years.
What is it that you don't understand?

You folks like things that go down?

Stevejhx only invest in assets that goes down.

:)

There, i said it. Am i the only one that enjoy fading Steve?

What's great about gold as opposed to NYC residential real estate obviously that it's very liquid and easily tradeable.

Stevehjx, your short position in GLD is? i'm long 1000 gld and will start buying puts on the next leg up...

Btw, The problem with gold is the GLD ETF (with a market cap of 56 billion), not all the dopey reasons steve cites, owning GLD is not owning gold, if the world goes really haywire gold will have value, the GLD ETF listed on your Schwab statement won't....When the Gold trade inevitably goes bad somehow or another the ETF GLD is going to be the culprit or at less add a lot fuel to the fire....does anybody know where the warehouses full of gold owned by State Street (issuer of GLD) are?

http://seekingalpha.com/article/110609-the-problem-with-gld-and-slv-etfs

The progressives hate gold because they can't deficit spend. If people own gold it takes the power away from the government. If the gov't can print money they can control you.

You're a european socialist Marxist liar.

You're a european socialist Marxist liar.

Are you sure? It doesn't seem likely. I mean, for starters, is julialg even in Europe?

Return America to the Gold standard.

Eliminate social security and medicare.

Abolish the income tax.

Down size washington to 1910 levels.

Retun power to the states.

In the NY times....

http://www.nytimes.com/2010/11/14/opinion/14grant.html?_r=1&ref=opinion

Great piece!
Sure in the old days, if a country discovered a large new supply of Gold, i could upset the apple cart, but what we have now is far worse. Additionally Ben Bernanke and his supporters have forgotten how valuable a rate of return is in a functioning economy. A positive real interest rate(not zero) makes sure that investments achieve a rate of return to justify financing the investment. When rates drop to zero, anything and everything starts to make sense(housing crisis anyone?) and bubbles and over-investment result. Lastly prior crisis have shown the Fed does not have the will or the omniscience to put the money back in the tooth paste tube after they put it into the system. When all these dollars the fed has been "printing" start circulating, we will see much more inflation than the 30% rise in commodity prices this past year would suggest.

Return America to the Gold standard.

Eliminate social security and medicare.

Abolish the income tax.

Down size washington to 1910 levels.

Retun power to the states.
-------------------------------

I was thinking about this in the Context of Gov Christie and the canceled commuter rail tunnel and Obama's stimulus. The tunnel would have generated a great many jobs, come in under budget(construction companies have spare capacity) improved the transportation infrastructure and generally helped business and encourage mass transit which also helps the environment.

So why was I thinking about Obama and the flubbed stimulus? Because the original intent was needed infrastructure(like transit tunnels and electric power grids) and not projects to study venereal disease , mice habitats and funding already approved state budgets. The American people needed to be able to look out their window and see actual projects their tax dollars were funding so they could feel their money was being well spent.

this is a funny post.
I, for one, have made Millions(literally) in gold/silver in the last few years: some much for a poor investment. sure beats SP500. Some of my professional partners are back to 2000 in their retirment funds:what a return (I am not even mentioning inflation or wall street fees).
Gold is the ONLY reserve assets of central banks: they must know something that the idiots on this post don't know: i'll let you in on it:"gold is MONEY".
It doesn't need industrial applications: that's why it's money: it's called "low marginal utility" (no time to elaborate).
As for the rest,with stupid central bankers stealing the value of the buying power of the currency in your pocket,I would recommend you keep some of your assets in it

So wait - something HAS to have 'intrinsic value' to be a good investment?

Gold has not been "the" best investment even among commodities over the past ten years, let alone among allmasset classes.

There are two commonly held views as to why money has value:

1. People are willing to accept it as payment (social convention).
2. The government says so (government decree).

The first reason, that being that money has value because people are willing to accept it as payment is nothing more than a circular argument. It states that money has value because it is accepted. Why is it accepted? ...because it has value!

The second belief is also false. As history reveals, government cannot be trusted to manage money. For a listing of country currencies that have suffered through hyperinflation or complete collapse click here.

Governments of every country throughout the entire history of mankind have sought to continuously erode the value of their currency over the long term. The two most successful currencies, the US dollar and British Pound have lost most of their value since inception.

Under the US Mint Act of 1792, the dollar was pegged at 24.75 grains of gold. There are 480 grains in a troy ounce. Thus it took 19.4 US dollars to purchase a single troy ounce of gold. As of Feb 23, 2007 it takes nearly 683 US dollar to purchase that same troy ounce of gold. That represents a 97% drop in value!

The British Pound originally represented one troy pound of sterling silver back in 1560. Elizabeth I and her advisor Sir Thomas Gresham (of Gresham's Law fame) established the new currency to bring about order created by the "Great Debasement" of 1543-51 when Henry VIII sought to finance his costly wars with both France and Scotland. Sterling silver is 92.5% pure silver. There are 12 troy ounces in a troy pound. As of Feb 23, 2007 it takes 81.9 GBP to purchase that same troy pound. That represents a value loss of 98.8%!

During an economic crisis or war (both during and after), the pressure to inflate the money supply becomes overwhelming, as any alternative is politically disastrous. Even during times of relative stability, governments seek to "stimulate" their economies through increasing "liquidity". In plain speak, they intend to increase the supply of money. That is functionally no different that a counterfeiter increasing the circulation of $100 bills in your neighbourhood albeit on a much larger scale.

Governments will seek to issue increasing amounts of money until the currency collapses at which time the public is given a whole host of explanations - corporate greed, foreigners, market manipulation, terrorism, ad nauseum. What is most ironic about this farce is that the Central Banks are portrayed as being inflation fighters. This makes about as much sense as me lighting your house on fire and than showing up with the fire brigade as a "firefighter".

When the public eyes are finally opened to what the government has done to their currency, the government is powerless to make people value the money. They normally issue price and wage control laws. Those who ignore those controls are treated as criminals. Non-paper assets such as gold may be confiscated in the "interests of the public good". Business and personal assets may be seized.

Despite whatever draconian measures the government imposes, the people will seek financial safe haven by storing their wealth in non-monetary assets, those of a foreign currency, or by hiding monetary metals such as gold and silver.

Thus, we can comfortably conclude that it is false to state that money has value because the government says it does.

Why Then Does Money Have Value?

According to the writings of an Austrian Economist, Ludwig von Mises, the purchasing power of money yesterday determines the demand for it today. This is a straightforward and understandable idea.

If at the end of yesterday, the price for a can of pop was one dollar. Assuming no external events such as a catastrophe wiping out the pop manufacturer overnight, why should we not start today with the price of pop being one dollar?

The price of the pop will fluctuate according to supply and demand for both the pop and the money. If another pop manufacturer begins to flood the market with a similar product, the price may drop to $0.90. On the other hand, if everybody in the community receives a windfall, the pop may rise in price to $1.10.

This is all fine and good, but what determined the value of money yesterday. Obviously it was the day prior. And so on...

But there must be a beginning ... and there is.

What is Money?

Money originally started out as a commodity. Originally, there was no such thing as money, there were only commodities and people exchanged them according to their wants and needs with one another.

Money has to fulfill three things:

1. It is a medium of exchange.
2. It is a store of value.
3. It is a unit of account.

All over the world, different commodities emerged to play a role as an acceptable medium of exchange. We commonly think only of gold and silver, but there were others. On the small group of South Pacific islands of Yap, large stones were used. Cowrie sea shells were used in America, Asia, Africa and Australia. Wampum shells became legal tender in Massachusetts in 1637 for trade with the natives. Tobacco was used in colonial Virginia. Salt was used as a currency in pre-coinage European societies. (The word salary actually derives its meaning from the Latin word salarium which means salt).

What was it that these particular commodities had in common? First off, they were relatively rare in the locales they were used. If we look at history we can see that those people who used a plentiful commodities for money were easily exploited. The stone money of the Yap Islands is a particularly illustrative tale.

Money Stones of the Yap Islands

The stones were made from a shimmering limestone not indigenous to Yap and thus were very rare. Expeditions to acquire new stones were organized by the chief who would select a group of brave and able men for the task. The main source for the stones was the island of Palau some 250 miles to the southwest. New stones were gotten at great peril, perhaps even loss of life, and were valued most highly.

This unique money system was forever changed when the Irish American David O'Keefe was shipwrecked on Yap in the nineteenth century. He later returned, with a sailing vessel and modern quarrying tools. Seeing a potentially profitable opportunity he exchanged stones for sea cucumbers and copra (coconut meat). With time the stones became so numerous on Yap that they ceased to have value as money and now serve today as a monetary novelty for visiting tourists.

With trade, people exchanged goods and those that were plentiful in some locations were transported to those were they were rare and valued. From this mechanism, only those commodities that were globally rare remained as a form of money.

Another trait of money is that it has a high level of marginal utility. That is to say, demand is not easily satisfied. This is why goods such as diamonds and gold are so valuable. Not only are they rare, but also a person will continue to desire them even after he has acquired some. The value of each subsequent acquired unit continues to be indistinguishable from the first.

Take an example of water. If I am thirsty, naturally I will desire some. I would even be willing to part with one hard-earned dollar for a bottle. After drinking that bottle, I would desire a second one much less and would be only willing to part with $0.50. After that purchase, I wouldn't be interested in another. Water has a very low marginal utility.

Gold, as history has shown, has a very high marginal utility. Most of the 155,000 tonnes that have been mined since mankind began extracting it from the ground are still around. This fact does not deter mining companies from continuing to spend more money on the exploration of gold that any other metal. No other commodity is hoarded to the same extent as gold.

2005 Mining Exploration Costs by Commodity

Silver, was a monetary metal for a long time alongside gold. However, it was found to have usefulness in industrial applications, namely photography and electronics. It seems that the value we placed upon silver was less than the value we placed upon photographs of Fido the family dog.

Rarity isn't the sole factor that determines if a commodity has a high marginal utility suitable for being money. Consider platinum that is priced much higher than gold. It isn't hoarded to anywhere close to the same extent and is consumed irrecoverably in industry - primarily for catalytic converters in automobiles.

So far, we haven't found a use for gold sufficient to justify us consuming it. As a result of gold's high marginal utility it has served as mankind best store of value out of all the commodities.

Finally, gold is denser than most metals, immutable and does not corrode. These factors enable money exchangers to quickly test and verify gold for what it is. Any base metal available at the time would decrease its density or react to the reagents such as nitric acid that gold is impervious to. Gold is the most malleable and ductile metal known. As such it is easily divisible and historically was used to make coins that couldn't be made counterfeit. These qualities ideally suit gold for fulfilling the last quality of money, that being a reliable unit of account.

From these arguments, we can clearly see that gold emerged as mankind's first choice for money.

Paper as Money

Paper money was first used in China during the early ninth century A.D. After numerous reforms due to excessive printing, the Chinese abandoned paper altogether in 1455.

The Mongol Empire that by 1236 included parts of China began issuing money, reaching a substantial level by 1260. The Persian city of Tabriz experimented with paper money in 1294 with disastrous effects described in Rashid al Din's History of the World. In the early 14th century both India and Japan experienced short-lived imitations of Chinese currency.

The earliest evidence of paper being used in Europe was that of an English goldsmith's note in 1633. Goldsmith's notes not only acted as receipts for reclaiming deposits but also as evidence of ability to pay.

Around 1660 goldsmiths' notes became widespread as evidence of ability to pay. In effect, they were as "good as gold". They were a much more convenient alternative to handling coins or bullion. This realization by the general population marked the start of banknotes being used as money.

For the following centuries, gold predominantly backed paper currencies. China was an exception to this as they used silver. Other countries such as those in Latin America, France and the US periodically used bimetallic standards - both silver and gold.

Countries would go off the metal standards so they could inflate the money supply in order to finance a war. The results were always disastrous as price inflation took hold. Until the resolution of WWII, countries normally returned back to the metal standard once peace resumed.

After WWII, the United States emerged as having the strongest economy of the world. In 1945, the U.S. produced half of the world's coal, more than half of the electricity, and two-thirds of the coal, it held a majority of investment capital, manufacturing production and exports, over 65% of the world's total gold reserves, and was the sole possessor of the atomic bomb.

Before the end of the war, delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire and signed the Bretton Woods Agreements during the first three weeks of July 1944.

The Bretton-Woods conference established, among other things, a new relationship between gold and paper money. As the prominent world power, the currency of the U.S. would become the reserve currency of the world and was itself redeemable in gold to the arbitrary amount of US$35 per ounce. Important commodities such as oil would be traded for in U.S. dollars.

As time progressed and the welfare/warfare state of the U.S. grew, the need for additional money was accomplished by the simple printing of money. Consequently, foreign nations began to value gold more than the dollar due to the fundamentals of supply and demand. Instead of taking dollars they demanded gold and the gold reserve of the U.S. began to dwindle.

Things came to a head in 1971 when it was observed that the U.S. would shortly run out of gold if the trend continued. On August 15, 1971, president Nixon unilaterally "closed the gold window", making the dollar inconvertible to gold directly, except on the open market. This effectively severed any last remnant of paper money being backed up by gold.

This continues to be the situation today.

Using Mises' framework of thought, also known as the regression theorem, we can infer that money did not emerge as a result of a government decree or social convention. The theorem shows that money must first emerge as a commodity. That commodity was predominantly gold.

Our money today is not backed up by anything other than governmental promises and insistence that it is worth something. Its value today is based upon its value yesterday subject to the events of the day. One of those things is the ever-continuing issuing of more money. Remember what happened to those people of the Yap Islands?

http://www.safehaven.com/article/7007/paper-rock--gold

to make ot short: gold is money, the USD (FRN)is a currency. you cannot store value in a fiat currency.

Gold has not been "the" best investment even among commodities over the past ten years, let alone among allmasset classes.

This misses the point, Gold is not an investment so much but a hedge against fiat currency risk and store of value.

If so, and platinum would have been better over the past ten years.

However, gold is NOT a hedge against inflation - if you run a correlation between CPI and gold prices, you find a medium correlation and a low r-squared. Gold is a hedge in w idely diversified portfolio, but commidity prices IN GENERAL are a MUCH better hedge against inflation than gold in particluar.

Well if you understand nothing about how money works, I guess the Austrian example would work wonders.

But of course it doesn't. The gold standard is a government promise: "For every $x I will give you y amount of gold."

Until, bad times, people start demanding their gold, and the government has to suspend the promise.

Since "fiat currencies" are based on the same "government promise" - "this is worth something" - as the "gold standard" - "this is worth x amount of gold" - there is no difference between them.

Because the government can't back up either promise.

Gold is limited in supply; the government CANNOT back up 100% of the money in circulation with gold (or anything else). The promise, then, is only worthwhile if no one takes the government up on it, because the entire demand for gold cannot be satisfied with the available supply.

And if gold itself were the currency - as it was when coins were made of the stuff - economics would be a zero-sum game, because anyone who "earned" money - gold - would have to take it from someone who "lost" it, so that the net amount of money in circulation - gold - stays the same. You can't even pay interest.

RS - you can claim gold is a hedge against "fiat currency risk," but it is not. Its price does not even keep up with inflation over the long-term. You have NO UNDERSTANDING of how money works, and even this simple example, which LICCdope might be able to get - is probably beyond your comprehension.

Gold was $40.00 an ounce in 1971...Today it's $1400
While it's true that gold has had periods of stability and some periods of decline, over the long haul it's done remarkably well as a store of wealth. And keep in mind unlike some currencies which have come and went, gold has stayed with us.

Hey how come Rolex isn't melting all their gold pieces?WTF r the Swiss stupid.

Hey how come Rolex isn't melting all their gold pieces?WTF r the Swiss stupid.

Bingo-That's when its become a bubble!!!

"over the long haul it's done remarkably well as a store of wealth."

Actually, no - you're taking an anomalous, bubble price. I've shown you elsewhere that it's not true, but you completely ignore that. Here is the history of gold prices:

http://goldinfo.net/yearly.html

Private ownership of gold was legalized on January 1, 1975. Its price was $139.29. Its price for the next 25 years did not change much - in 2000 it was $279.11. It wasn't until 2006 that the price of gold caught up with inflation, taking the 1975 price as a basis. If you take the pre-liberalization year of 1974 as a basis, then gold did not catch up with inflation until 2008.

You seem to think that gold's price's having doubled since 2007 is a natural phenomenon. Wrong again. Look at the figures. Gold goes up, it goes down. If you think prices are going to stay where there currently are for any period of time, for a metal with no intrinsic industrial uses, you may be in for a big shock.

Every other bubble in the history of the world has collapsed. This will be no exception. Check out gold in 1979 - $459.00 - and in 2001 - $271.04. THAT IS NOT A "REMARKABLY GOOD STORE OF WEALTH."

You're deceiving yourself.

http://www.marketwatch.com/video/asset/golds-rise-may-end-badly-for-investors-2010-11-11/7738F452-A1A7-44DD-8605-DC73B852B684

Enjoy.

Gold was $40 an ounce in 1970 because it was illegal to buy, sell, and trade it. It was the price fixed after WWII.

Fool.

In 1900 it was $21 an ounce.

"I was thinking about this in the Context of Gov Christie and the canceled commuter rail tunnel and Obama's stimulus. The tunnel would have generated a great many jobs, come in under budget(construction companies have spare capacity) improved the transportation infrastructure and generally helped business and encourage mass transit which also helps the environment."

Christie is a fat slob who only cares about himself and his poll numbers.... in IOWA.

"In 1900 it was $21 an ounce."

Because the price was FIXED, you fool. Currencies were fixed to the price of gold, and therefore to each other. It was the way in which governments dealt with international trade - by paying each other in gold reserves, because currencies, at that time, weren't fungible, and there was no way to send pounds sterling to the US and exchange them for anything. Thus they used gold; there were no international FX markets or interbank money markets, or anything similar. Those fixed currency rates were abandoned and readopted many times over.

The gold standard is just as much a "fiat" as no gold standard:

1) Governments do not hold enough gold to back ALL currency and other forms of money in circulation. Not even close. Nor could they - there isn't that much gold.

2) The "gold standard" was much like present-day bank reserves: governments kept a small portion of the total - and ever changing - money supply in "reserve," in gold, with a promise to pay. That promise to pay was originally derived from international trade needs. In other words, gold then played the role of dollars and yen and euros today, which are freely traded on markets.

3) Governments promised to redeem your coins and notes and deposits into gold.

4) Governments didn't have enough to do that, however.

5) Thus, just as with the bank runs of the 1930's, whenever things started to go bad and people demanded their money in gold, governments had to suspend that "promise" because they didn't have enough gold to make good on the promise. Read wikipedia for a history of international gold outflows caused by trade imbalances.

6) The gold standard does not mean, and never meant, that gold is the actual currency: there isn't enough of it and there's a fixed supply of it. Therefore, an economy - which by definition has a varying money supply - cannot survive if any fixed entity is used as the currency, because economics would be a zero-sum game: new money CAN'T be added to the system, so every time one person made money, another would have to lose it.

The only way around that is massive deflation - the price of everything would have to fall because gold would be worth more and more as the economy expanded, and there was no way to change the fixed supply of money. Interest couldn't be charged and there would be no multiplier effect.

If we had the 1920's gold standard now, China would soon have all of it, because we don't have enough gold to cover our foreign debt. Is that what you want?

You are really, really dumb Riversider. I'm sorry to say this, but you believe in things that just by thinking about them make no sense. Invest in gold today if you want to, but it does not do and is not what you think it is and does. Look at the history of gold prices.

Read "The Intelligent Investor" - it will be an enlightening lesson to you on booms and busts.

7) In other words, money can't be created and destroyed as it normally is in any economy - with the gold standard or without it. It would lead to ruin.

Sorry about my editing - 7) should come after 6)

:)

http://www.marketwatch.com/story/etfs-mint-new-bout-of-metals-speculation-2010-11-14

Fking idiot. It's BC gold makes up about 5% of the actual cost of a Rolex. 90% is marketing.

So RS, what do you think of the "gold standard" now? Still think it works?

It was only as recently as 1971 that the United States unilaterally ended Bretton Woods and ceased allowing for gold convertability. Currently there is very little that stops the Federal Reserve or Treasury from debasing the currency and in fact there are many local and international Financiers that advocate some partial return to pegging the dollar against a basket of commodities(most recently German Finance Minister Wolfgang Schäuble and in today's paper James Grant,Charles W. Calomiris,Jim Chanos and John Taylor amongst others).

There are some people arguing that today we have commodity inflation, with a great deal of new demand coming from emerging economies, but it is also true that with the dollar falling in value as a result of the "printing of the money" also known as quantitative easing, that it may simply be that a depreciated dollar simply buys less goods, which is not good for Americans. A return to some form of Gold Standard would impose a certain discipline on the Federal Reserve which is sorely lacking in today's times.

And keep in mind that the Fed is not perfect. Far from it, they've missed every crisis that has occurred these past twenty years and in fact contributed to their formation(internet bubble, housing bubble, subprime bubble). What makes them so smart now?

what's ur point?

Gold IS a commidity. Valuing our currency based on something that moves up an down with wild swings is not smart. "Fixing" the price of gold at a set amount can and has led to massive periods of inflation and deflation when new gold enters the global markets (Rome conquering Egypt, the Spanish conquest of the Incas and Aztecs, the Californian, Australian, South African and Alaska gold rushed, etc.)

Silly, silly idea.

I am surprised to say that- steve has gotten boring. He keeps recycling his same wrong arguments, flawed analysis, lame insults, distortions and lies over and over again. He knows everyone sees his positions as foolish and I think he is trying to badger everyone to thinking he is smart, when we all know the reality.

Sad.

Then LICCdope - BUY GOLD!

That's what Glenn Beck has you doing, no?

Gold has done well recently in the US. How has it done in Euros or Japanese currency terms?

If you bought Gold in 1975 or 1981 or 1990 you would have done much worse versus USTs, corporate bonds the S&P 500, or, yes, real estate.

Over the last 12 years, oil would have been better.

And so on.

Gold has RECENTLY done well, but its clearly not been a long term good bet over anyone's lifetime.

To wit, copper was $2000 per ton in 2000 on the LME, and is now $7000. Better than gold.

Since 1981, also better.

Also, its more correlated with inflation (by any measure of inflation.)

copper has intrinsic value

the number of broken goldbugs who have trumpeted their beliefs over the year is very large; very few have participated in what really is a blip up of a few precious years in a long cycle of scams and underperformance

buy gold from goldline--a strategy endorsed by glenn beck

Better yet, stuff all of your jewelry into a bag, DHL it to Glenn Beck, and wait for the check back.

From 2004 to now, ICE brent crude has tripled...and qunitupled since the late 90s...

Basically , it's not that Gold has been so great, it's that the dollar has sucked eggs.

I'm in total agreement on the intrinsic point. Someone gave me the choice between an ounce of gold and an ounce of copper and naturally I took the ounce of copper. It's value is not just what someone else would pay me for it, but it also has value in and of itself. That's what is important in this day and age. Intrinsic value and of course my own self worth. Gosh darn it.

All you need to know.

The progressives hate gold because they can't deficit spend. If people own gold it takes the power away from the government. If the gov't can print money they can control you.

I don't like it because Cramer said 2.5 years ago to buy it.

Gold is more of a currency than an investment. Past several years it has been an attractive currency to be in as the value of the dollar has been depreciated.

Urban digs got it.

There's an emotional reaction to gold that goes beyond the pure facts.

What's that actually mean?

http://www.npr.org/player/v2/mediaPlayer.html?action=1&t=1&islist=false&id=130575234&m=130582469

The periodic table lists 118 different chemical elements. And yet, for thousands of years, humans have really, really liked one of them in particular: gold. Gold has been used as money for millennia, and its price has been going through the roof.

Why gold? Why not osmium, lithium, or ruthenium?

We went to an expert to find out: Sanat Kumar, a chemical engineer at Columbia University. We asked him to take the periodic table, and start eliminating anything that wouldn't work as money.

The periodic table looks kind of like a bingo card. Each square has a different element in it — one for carbon, another for gold, and so on.

Sanat starts with the far-right column of the table. The elements there have a really appealing characteristic: They're not going to change. They're chemically stable.

But there's also a big drawback: They're gases. You could put all your gaseous money in a jar, but if you opened the jar, you'd be broke. So Sanat crosses out the right-hand column.

Then he swings over to the far left-hand column, and points to one of the elements there: Lithium

"If you expose lithium to air, it will cause a huge fire that can burn through concrete walls," he says.

Money that spontaneously bursts into flames is clearly a bad idea. In fact, you don't want your money undergoing any kind of spontaneous chemical reactions. And it turns out that a lot of the elements in the periodic table are pretty reactive.

Not all of them burst into flames. But sometimes they corrode, start to fall apart.

So Sanat crosses out another 38 elements, because they're too reactive.

Then we ask him about those two weird rows at the bottom of the table. They're always broken out separately from the main table, and they have some great names — promethium, einsteinium.

But it turns out they’re radioactive — put some einsteinium in your pocket, and a year later, you’ll be dead.

So we’re down from 118 elements to 30, and we’ve come up with a list of three key requirements:

1. Not a gas.
2. Doesn’t corrode or burst into flames
3. Doesn’t kill you.

Now Sanat adds a new requirement: You want the thing you pick to be rare. This lets him cross off a lot of the boxes near the top of the table, because the elements clustered there tend to be more abundant.

At the same time, you don’t want to pick an element that’s too rare. So osmium — which apparently comes to earth via meteorites — gets the axe.

That leaves us with just five elements: rhodium, palladium, silver, platinum and gold. And all of them, as it happens, are considered precious metals.

But even here we can cross things out. Silver has been widely used as money, of course. But its reactive — it tarnishes. So Sanat says it’s not the best choice.

Early civilizations couldn’t have used rhodium or palladium, because they weren’t discovered until the early 1800s.

That leaves platinum and gold, both of which can be found in rivers and streams.

But if you were in the ancient world and wanted to make platinum coins, you would have needed some sort of magic furnace from the future. The melting point for platinum is over 3,000 degrees Fahrenheit.

Gold happens to melt at a much lower temperature, which made it much easier for pre-industrial people to work with.

So we ask Sanat: If we could run the clock back and start history again, could things go a different way, or would gold emerge again as the element of choice?

"For the earth, with every parameter we have, gold is the sweet spot," he says. "It would come out no other way."

Today of course, we don't use gold as money; we use paper. It doesn't kill you, but it can be found in abundance and has an annoying tendency to burn when it comes into contact with a flame.

http://www.npr.org/blogs/money/2010/11/18/131430755/a-chemist-explains-why-gold-beat-out-lithium-osmium-einsteinium

They're gases.

http://www.nytimes.com/2010/11/26/business/26norris.html?pagewanted=1&ref=business

....it reflects first and foremost a dismay at the current state of the world economy, and a conclusion that the elites who are running it do not know what they are doing.

Or, as a friend of mine put it, “You are buying gold because it is the alternative to this collection of stupid politicians around the world.”

I think you mis-read the point and intent of the article riversider.

Nope!

"Store of value

Low returns on other investments and fears about the world economy have caused the price of gold to soar. Don’t count on its continued rise..."

http://www.economist.com/node/16536800

There's a strong possibility that gold has gotten ahead of itself here. That said on a longer term basis, as long as central banks are all racing to the bottom there will be more demand for gold. What will make gold come back down long term is if the bond vigilantes come back.

What is the best performing asset over the past 10 years?

Why fight it?

"What is the best performing asset over the past 10 years? "

NOT Gold. As I showed several times above. And what performs better once the economy starts growing again? All sorts of commidities not named Gold.

People like you are too stupid to realize that its not simply "Gold or the S&P 500." There are many, many other asset classes.

Gold is a bad investment because it's gone up from under $300 at the start of the milenium to $1429 as of today. Silver stinks for the same reason.

Ericho - You're the guy who touts an investment only AFTER it's already run up 100%. You're a "peak of the bubble" kind of guy. No wonder everyone here thinks you're a moron. I love being on the opposite side of trades from guys like you! Keep the wisdom coming!

Platinum always is cheapest in a weak economy and doubles or triples when the economy is strong...hmmmm....

ericho/redbaiter---i concede--it's time for you guys to buy some gold

"Ericho - You're the guy who touts an investment only AFTER it's already run up 100%. You're a "peak of the bubble" kind of guy. No wonder everyone here thinks you're a moron. I love being on the opposite side of trades from guys like you! Keep the wisdom coming!"

HHAHAHAHAHAAHAHAHAAA!!!!!

1500!!!

Nice trade.

Can someone please explain to me why most people in this thread are giving opinions and have clearly never even taken a basic macroeconomics course?

IT DOESN'T MATTER WHAT GOLD DID IN THE LAST 10 YEARS. Take a long run look at gold. It is not a steady metric for anything. It is a hedge in a well diversified portfolio because it has a negative beta to the market as a whole.

If you bought gold 10 years ago and held it to now, great! Congrats you made money. It does not make it a good investment. It was a successful trade, nothing more. It can tank to half it's value tomorrow and there's no reason it shouldn't. Is the probability small? Perhaps, but that's not the point.

Money has value because people have full faith in the gov't that issues it to maintain some form of stability in it. That's why so many countries function using US dollars... it is quite stable as a universal currency. GOLD IS NOT. There is no entity that backs gold in good faith. Therefore, it is the same exact thing as using hotdogs as money. Look at the long run chart of gold over the last century.

It's so easy to say it's a currency when you look at 2000 to 2010. Why not take a look at 1900 to 2010 and explain how it's a currency with ANY sort of stability or dependability?

Stop arguing BS when most of you have no idea what you're talking about.

Well, my knowledge of economics extends significantly beyond that of a basic macroeconomics course, so saiyar1 isn't talking to me. How about the rest of you people?

"It is not a steady metric for anything. It is a hedge in a well diversified portfolio because it has a negative beta to the market as a whole."

Complete load of bullchit.

"If you bought gold 10 years ago and held it to now, great! Congrats you made money. It does not make it a good investment."

Up 500% since 1999 and it does not make it a good investment?

MUHAHAHAHAHAHAHHAHAHAHHAHAHAHAHHA!!!!!

@ericho75:
Ok and from '78-'85 I more than halved. What's your point? Again, just because you made money does not mean this is a sound investment.

Stop confusing a successful trade with the definition of investing.

You're sounding really stupid to anyone who has the slightest clue about finance.

And by the way, do you have ANY clue about what the CAPM is? Gold being a hedge for a well diversified portfolio is a simple outcome of this widely accepted theory. This is standard accepted finance theory. If you want to deny that, then you can go ahead and suggest a methodology that is better... experts have tried and failed to find anything better forward looking, no matter how complicated. You're not going to succeed.

Stop looking in hindsight and thinking the past predicts anything about the future.