Gold is NOT an “Investment”

This article is WAY off topic from what I normally write about.  However, there are forces at work and recent events that require me to post this.

There’s been a lot of talk and media attention about gold, the stock market, and the stability of the US Dollar.  The Fed has been printing over $1 Trillion a year for the last 5 years and no one seems to think that will have any implications.

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Bwhaaa haaaa haaaahaaaa!

Are you kidding me?

Gold jumped to $1900 an ounce late in 2012 and people said “it’s a bull market!  buy gold!”

This article will explain why gold is not and has never been an investment and why the US Dollar is losing value even as you are reading this article  (what that means is tomorrow, you will not be able to buy as much as you were able to buy today).

If someone tells you, “I am going to invest in gold”, what are they saying?  If you strip away all of the emotion and the words and their meanings, what does it really mean?

First – it means that you are going to trade a certain numbers of dollars, which have zero intrinsic value, for a certain amount of gold, which has been a store of value since the beginning of time.  Well, since around 8,000 years ago anyway.  Go back and re-read that sentence again.  You are trading items that are worthless for items that have real value.  Is that what an investment is?

Most people think that an investment is something you “buy”.  For example, if you buy a rental home, you consider it an investment.  If you buy stocks or bonds, you consider them investments.  Investments are not dollars or precious metals.  They are really paper that are tied to either debt or equity in a company.  Real estate is the exception – it is a “hard asset”.  Unless you are buying real estate, you are buying paper.

Sure, the paper you buy says it is worth so many dollars that a company owes you, or it is worth a certain percentage ownership of a company.  But at the end of the day – you are trading (listen close here) – worthless paper for other paper.  In your mind, you may be imagining that company and how a part of it is yours.  I really hope that gives you a warm fuzzy when you think that.  Really – I do.

Because the rest of this article is just gonna piss you off.

Consider this statement:  “All of the debt owed by everyone in this country, and in the rest of the world, was printed on a printer.”  We’ll come back to this.

usdollarsYou read above, in this article, that the FED was printing over 1 trillion dollars a year and putting it into the world economy.  The current amount of goods or services available in the world is pretty much fixed at any point in time.  Sure it goes up and down with time but if we looked at say, a year, then the amount of goods and services produced in the world would look pretty much as a constant.

We have to buy those goods and services with dollars.  With US Dollars to be more precise – it is the “world currency”.  If the number of dollars stay constant while the amount of goods and services stay constant, then the “prices” of everything stay stable.

BUT… if we just print up a bunch more dollars, like a few TRILLION of them and pass them out to our friends, what happens then?  Notice I said, “pass them out to your friends”?  The reason is because that is what is happening.  When the dollars get printed or created, they are always loaned to the member banks – the member banks of the Federal Reserve (which is a private bank not a government owned bank).  Can you say “huge bonuses to bankers”?

So the dollars are LOANED to the member banks and in turn they loan those same dollars out to us.  Or at least that was the original idea.  It was a crappy idea as far as we are concerned.  The Constitution of the United States says that ONLY the US Government has the power to coin money.  But somehow, even after 2 central banks were shut down by former presidents, somehow the bankers got it done  in 1913.  Now we have the “Federal Reserve Bank” which is a private bank and privately owned.  But I digress…

Today, the Federal Reserve is buying the debt or bonds issued by the US Government DIRECTLY FROM the US government.  The US needs money to operate so they go the the Federal Reserve, a privately owned bank, and ask for a loan.  They give the FED a few bonds and the FED turns on the printing press and prints a few more trillion dollars to loan to the USA.

Remember – what they are printing has no REAL WORLD value other than faith.  It’s just paper that has pretty colors and pictures.

Side note:  In a normal monetary environment, if the USA needs investors to buy their bonds, or people to borrow money from, they have to agree to pay a higher interest rate – especially if they NEED money.  Investors will buy things that offer them a higher yield or a higher return.  So anyone that needs to borrow has to offer a higher rate.

Higher interest rates slow economies and slow growth, right?  That’s why the FED is now printing money and “buying” the USA government bonds.  Get it?  If the FED loans all the money the USA needs to borrow, then interest rates stay very low because the USA doesn’t “need” money!  They no longer have to rely upon individual and corporate investors to buy the bonds or loan money to them.  Now the US has the FED, which is a private bank and will do anything to book another loan.  There’s more to it – but if you “get” that part, you are starting to understand.  The FED is just printing whatever the US Government needs.federal-reserve

So let’s go back to that price thing.  Earlier in this article, I made a point that as long as the supply of goods and services was relatively constant, and the number of dollars floating around in the world was relatively constant, then the number of dollars we have to exchange for an item stay constant.  That’s the “price” of the item – how many dollars it takes to get it.

But wait… The FED has printed probably somewhere around 7 trillion dollars in the last 4 years.  Those dollars are circulating in the system now.  But prices have only edged up a little bit.  What gives?  You would think that if the numbers of dollars jumped up, then the numbers of dollars it takes to buy something would go up – right?  I mean, if I have a printing machine and I just print as many dollars as I can, then you – the seller of something – will want more and more of those dollars in exchange for whatever it is you are selling.  We call this price increase “inflation”.  That is a word invented by economists and the government.  They try to make you think that prices “inflate” and go up over time.

Nothing could be further from the truth.

The correct word is devaluation.  And it only applies to the US Dollar.  When there are very few of a certain something, that certain something is worth a lot.  But if you pass that something out to everyone in the world in large numbers, then that something becomes worth less and will eventually be worthless.  And isn’t that exactly what has been happening?  The FED has been printing money so fast it burns up printing presses.  It is unprecedented in this country’s history (that means it has never happened before – ever).

But “prices”, the number of dollars it takes to get something, have not been spiraling upward out of control.  Economist idiots would call spiraling prices hyper-inflation.  You and I now know it is, in reality, rapid dollar devaluation.  So why isn’t the price of everything going through the roof?  That’s what should be happening after all these dollars have been printed.  So why isn’t it?

There are several factors.

The first one is that interest rates are almost zero.  And now we know why!  The FED has been buying all the bonds that the US Goverment can print.  Since there is no problem with demand for the bonds, the rates stay super low.  People don’t like those low rates so they seek other places to put their money.  Like, uhhhh – the stock market! (notice it’s been on a run lately?)

The second is the “price” of gold.  Even though the US Dollar hasn’t been related to gold since 1971, the markets still tie them together.  While it’s just a mental faith type thing, it exists.  So – if the number of dollars it takes to buy a certain amount of gold stays about the same, then the markets think there is no dollar devaluation.  This happens because the “price” of gold, the number of dollars it takes to acquire it, remains relatively the same over time.

If an ounce of gold is worth so many dollars – and it stays consistent – then the dollar itself is not changing in value.  Or at least that’s the idea.

Unfortunately…

Recently, it has come to light that the FED, the private bank, is manipulating the gold market.  The way they do this is to sell gold “short” which pushes the price down.  Even better?  If they have need to to control the price, the FED has sold “naked short” gold.  That means that they don’t have the gold that they are selling.  And when they do it, they do it in huge numbers to keep the price down.  In the past, this would have been highly illegal.  Once they get the price down, they quietly buy gold from ETF’s to cover their short positions and they do the buy backs over a longer period of time so that the price doesn’t jump up.  So the FED is selling fast but buying slow to manipulate the gold market price.  For now – it is working.  For now.

So – is gold an investment?

No.  Gold is something that you can trade dollars for that has real value and has had real value for the last 8,000 years.  Electricity and computer chips do not change its intrinsic value.  Currencies, like the US Dollar or the Chinese Yuan, are not real money.  They represent money, but they are not real money – they are currencies.

Gold is insurance.  It is not an investment.  If you own physical gold, in your home, you are protected against the hyper devaluation of the currency – the US Dollar.  Investments are things you buy low and sell high – right?  From that point of view, you might buy gold at $1500 an ounce and then the price goes to $10,000 an ounce.  Would you sell?  Would you want to sell?

gas-priceIf this happens, it means that the dollar has been devalued by a factor of about 600%.  Which means the “price” of a gallon of gas would have jumped to $24/gallon.

Would you want to sell your REAL MONEY(gold) into that kind of US Dollar rapid value change?  You might sell your gold and within 24 hours your dollars would only buy half of what they could the day before – think $48/gallon gas.  Why would any sane person sell if this was going on?

Sure, there will be dumb people looking at the “price” of gold and thinking they are rich because now they have $10 million in gold.  They want to sell and be rich for – like a day.   I can’t help those people.  I can only try to help you.

Gold is insurance for if…. no – when this happens.

It is a store of value, has been for over 8,000 years, and will be after the value of the dollar goes to zero or is artificially reset by some government to $50,000 an ounce.  Get some.  Hold it.

My people have approximately 10% of our assets in physical gold.

 

Mike Carraway is a REALTOR, instructor, speaker and author of 2 best selling books.

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