Jim Wang of Bargaineering highlighted an article that caught my attention last week. The author, Henry Blodget, wrote: Gold Prices Collapse As Everyone Remembers It’s Just Yellow Metal.
Two thoughts came to mind:
1) Yes it’s that Henry Blodget from the Internet bubble days of around 1998 and 1999. It seemed like whatever stock he wrote about suddenly jumped a ton. He’s probably most famous for saying that Amazon should be a $400 stock and it jumped over 100% to fulfill his prophecy.
2) I feel like I’ve written this article before… maybe even a couple times.
Almost 5 years to the day, I wrote about how I invested my IRA money. Each year I take reader suggestions on investing ideas and a few readers suggested gold. My response to the suggestions was:
“I simply hate gold as an investment. I don’t like how it’s not a basic necessity of life in today’s modern world. It makes as much sense to me as investing in tulips. I know it’s stood the test of time, but I think times were different before flat panel TVs and flashy cars. People would use their gold collection to show off their value in society. Today, people use other possessions. I don’t see a trend toward people selling their useful possessions for a hunk of gold. If anything it’s the other way around.”
(I always cringe a little when I read things I wrote a few years ago.)
Bloget’s article covers the conventional wisdom that gold “would protect the value of your savings from the ravages of out-of-control government money printing” and is “free from the accounting shenanigans, corruption, fraud, and operational uncertainty of stocks and companies” and thus would continue to rise.
However as prices are down 30% from their peak about two years ago, it is clear that just like any other commodity, there’s no guarantee it is going go up indefinitely. In fact, you can almost always plan on a crash on at some point… especially if it has gone up a lot over a long time like gold.
Blodget writes something that I tried to get at when I wrote about comparing investing in gold with investing in tulips:
“If this were mere ‘volatility’ — if gold had some fundamental value that it would likely eventually return to — then the price drop would be no big deal. But there’s no solid theoretical way to ‘value’ gold, so its price could do almost anything… The only thing that determines the price of gold is what someone is willing to pay for it.”
Doesn’t that remind everyone of BitCoins?
Those who would turn to gold as an alternative to money are simply replacing a de jure currency with a de facto currency.
Currency of any sort only has value in a stable marketplace. In a complete collapse, the productive assets are the things that are going to have value. (I understand the gold has some productive uses in industry, but for the lay person, these uses aren’t going to come into play very often.)
Completely with you LM – I never got into gold. I just don’t get it in a modern world. It feels like it is a hedge to inflation only because everyone (i.e. market) says it is not because I am going to bring my gold coins down to the grocery store in exchange for a head of lettuce.
If [poop] really were to hit the fan I’d much rather have bullets than gold.
Laurie Pysczynski says
Reminds me of the craze on ebay…at some point people were paying $20,$30,$50 for Beanie Babies that cost $6. I know someone who held on to them feeling that they would just continue to soar!! HA, they are stuffed animals and there were millions made…only worth what someone will pay you the moment you need to sell it! I know gold has stood the test of time but I’m with you…who is going to buy it when things get rough.
“I know gold has stood the test of time but I’m with you”
Yep – a lot of things stand the test of time … until they don’t. Horses, for example. They had a heckuva run as the best way to get to point A to point B, but they along came the internal combustion engine.
Past performance is no guarantee of future results.
There has never been such a crowded trade as the inflation trade and the case for gold as a hedge and safe haven. There is nothing contrarian about this trade – in fact gold as a safe haven and inflation trade it is so consensual and crowded, it could never work. A safe haven loses it’s safety when it’s too obvious and too popular and easy to articulate. I wrote an article two years ago (End of America is Nigh) suggesting we should prepare for deflation – not inflation. Gold (like everything else) falls in a deflationary environment – and this I believe is the most likely scenario for our near future. ** See Japan and the Great Depression for the playbook.
The other problem with gold is it impossible to assign a value to it, so how do you invest in it? Intelligent investing comes from knowing (not guessing) what something is worth and buying it for less. I do not believe you can invest intelligently in this commodity. You can have a “feeling” that gold that is going to be worth less or more in the future but you cannot put a fair price on gold because you cannot know what it’s intrinsic value is.
I have little faith in gold as a safe haven, and have a strong “feeling” the price of gold will continue to fall in the coming years as heavily indebted economies in western Europe, Japan, and the US grind to a halt under the crushing weight of their past sins.