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Gold – a useless commodity, and an even worse indicator of anything.

10.27.2008 · Posted in DJIA, Gold, investment, platinum, S&P, silver, Uncategorized

Every time the market fluctuates to the down-side, we seem to get inundated with Gold advertisements – with all sorts of theories including:

a. One that gold’s price – after accounting for inflation is at a fraction of (your favorite year here)’s quotation.

b. The Dow/Gold theory that one unit of gold will equal the DJIA – in other words, either gold is worth ten fold what it is now, or the DJIA is worth 10x less than where it is now. Both scenarios are not just unlikely, but stupid, and sophomoric at best.

Let’s get to the specifics of gold.  A good seventy percent of gold production is used for the manufacture of jewelry – with my fellow Indians being the single largest purchasers of auric adornments. A smaller fraction is used by China for similar purposes. A mere 20% of this world’s production is used in industry – where heat and electricity need to be conducted as rapidly as possible [electronics and the automotive industries is where it is used extensively].  Thanks to gold being a NOBLE metal, it reacts with almost nothing, and dissolves in cyanide and aqua-regia – making the extraction [to spec] of Gold,  one of the most difficult and toxic processes in the whole world.

Since gold is a noble metal, it is never consumed by industrial processes.  It is used to bond chips to packages [bond-wire] – and conduct electrical signals from silicon to the external pins of a chip.  It is used in exotic cars for radiating heat from engines/exhaust systems, etc.  None of this “consumes” the gold.  In fact a lot of chips are processed – to re-extract the gold contained in them.

For centuries, gold was the standard by which all else would be measured. In fact most currencies were pegged to the amount of gold that their treasury had in store.  But all of that changed when FDR signed an executive order to ban US Citizens from owning/hoarding gold – and mandated them to use fiat currency [the dollar].  The Bank of England followed and in the early 1900′s, stopped the conversion of pounds to gold.

Thanks to a liquid market, gold prices are quoted every day [bid and ask], and are actively traded on the Nymex [now a division of the CME].  While buying gold stocks and gold mining companies is easy, buying and storing gold [as an investment] is in my books, a lose-lose proposition.

First, you pay a large bid/ask spread for the commodity – which in this case is HUGE.

Second, you often pay for storage and insurance of the gold that you bought.

Third, you wait years for it to go up – while stocks out-pace your returns, and often, pay dividends

Fourth – there is not much leverage you can use – unless you are “playing” with options or futures, and that is not the same as investing in gold. It is more of speculating in gold.

Fifth, it is the fact that if you randomly pick ten year horizons, only the most carefully chosen time-frames will result in a better outcome than an investment in the S&P [or DJIA].

Sixth, and most importantly, if currency were pegged to gold, sure there will be little inflation, but it definitely would have frozen the flow of capital, and the expansion of capital markets [which has been a good thing in the last half a century despite some recent setbacks].  Since this is an academic detail at this point, and the latest misguided attempt to create a gold-based islamic currency was a failure, I declare gold – as a currency, dead.  It is a commodity, and in the past month, the US dollar has been deemed by markets as a safer haven than gold.  Long live the dollar – and the full faith and credit of the US.

Bottom-line: Wear it, enjoy it, buy it for fun, but do not invest in gold. It is NOT an investment now, nor is it in the future.

© Bapcha’s Stocks, Oct 27, 2008.

More on this topic (What's this?) Read more on Gold at Wikinvest

9 Responses to “Gold – a useless commodity, and an even worse indicator of anything.”

  1. Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor

  2. I will bookmark this page, and wait for you to eat your words in the coming years.

    “in the past month, the US dollar has been deemed by markets as a safer haven than gold.”

    So a month now defines a trend. Interesting. I guess the gold vs. the DX index since 2000 means nothing to you.


  3. When, or if the dollar collapses gold will be the only thing left that has value worldwide. Silver too. With China and the rest of the world buying US debt at a record pace, eventually they will start selling dollars and when they do not find buyers what then happens to the dollar? Gold and silver will be the only real money left, those that own will have real assets while those holding dollars will be destitute….

  4. nevket240 says:

    Dear Sir:
    ha ha ha ha ha ha ha!!!

    Keep smokin dude. One day you will see the light. The Golden glow.


  5. This guy must be a lover of the Fed and its “valuable” fiat. Perhaps you missed your history lesson about every fiat currency system used eventually devalued to nothing. Take note: French Revolution, colonial Continentals, and Germany after WWI reparations; just to name a few.

  6. Нежели это не большой секрет;), создатель блога откудо родом?

  7. garrat cooper says:

    gold isn’t real money it’s just a borderline useless metal that people think is valuable. ANYTHING can be money cause all money is is a medium for trade to be honest I’d rather have salt be money since we can actually use it for something. The problem with gold is that it can be easily controlled ione could cause a miners strike of gold and gold production halts or better yet the bankers would decide to hoard it. the problem is dishonesty not what the commodity is. I would be nice if we could free ourselves from money.

  8. [...] with Hamid Karzai.  (From The New Republic) 3. Gold is over $1000 an ounce. And by the way:  totally useless – People are flocking to gold.  Allow me to point something out:  Right now, with one ounce of [...]

  9. So true, but it is not a useless metal(simply overvalued), it is soft, naturally inert, excellant free-electron density. Gold salts and electronics are excellant. As for gold mining, there is more than enough gold in the Fort Bronx to use for every practical use.

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