The Prostitution of Gold

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The gold market has become a social gathering place for an odd combination of participants. Those participants range from the gullible and the disillusioned to those seeking the next big thing.

Permeating the atmosphere surrounding the commotion are false fundamentals and faulty logic. Fundamental analysis, or what passes for it, gets distorted and perverted beyond recognition.

Through it all, the traders and speculators dominate. The loudest voice of all, though, belongs to the marketers; those who have something to sell: "I'll show you how to save your financial soul when you subscribe to my newsletter!". Or, it may sound something like this: "My unique timing system will get you into gold and out of it at the right times".

Product vendors scream about their prices being the lowest and the best; and, with up-to-the-minute updates and constant live streaming, anyone can know everything they need to know and more. Just sign here...

LEGITIMIZATION OF GOLD

How did this happen? In the early stages of the decade-long increase in gold's price beginning in 2001, a few technical analysts began talking about and marketing their own systems for trading shorter-term movements in the gold price. In theory, it sounded reasonable, but in practice it was difficult because it required reliance on gold stocks or commodity futures.

Then, along came GLD, a gold-related exchange traded fund (ETF) that mimicked the daily price movements of gold.

GLD is Wall Street's answer to the clamor of investors and brokers for inclusion of gold as segment of portfolio allocation.

Wall Street doesn't like gold.  Financial advisors are in the business of managing money. In order to satisfy the demand for gold-related investment vehicles, it has given us a plethora of stocks, mutual funds, ETFs, and other paper substitutes and products that supposedly represent the real thing.

Your broker or financial planner can easily incorporate these types of investments into your asset allocation model without too much trouble. It boils down to marketing. It's all about money under management.

Your broker or financial planner isn't going to tell you to buy gold coins with 10-20 percent of your assets and take delivery of them. But, he or she might tell you to put some of your dollars into a gold-related mutual fund or ETF.

The advent of gold ETFs (paper gold) legitimized gold as an investment; incorrectly so, but it was still a boon to Wall Street.

GOLD IS NOT AN INVESTMENT

Simply characterizing gold as an investment doesn't change its inherent nature, though. Gold never was, is not now, and never will be an investment in a traditional, factual sense. That is because gold provides no added value. 

There is nothing fundamental about gold on which to base expectations for its value to increase over time. The only reason that the price of gold rises over time is to reflect the loss of purchasing power in the U.S. dollar.

Gold's value is centered in its use as money. Gold is real money because it meets the three characteristics of money: 1) a medium of exchange; 2) a measure of value; and 3) a store of value.

Gold is also original money. The U.S. dollar and all fiat currencies are substitutes for real money; i.e., gold. Gold is the original measure of value for everything else.

Efforts to price gold in other currencies have no effect on the value of gold. If gold were suddenly priced in Chinese yuan, for example, any changes in price afterwards would still tell us nothing about gold - only about changes in the value/purchasing power of the yuan. (see Gold And $USD/CNY)

CONCLUSION AND STATEMENTS OF FACT

1. Gold is real money; nothing else is.
2. Gold is original money; all fiat currencies are substitutes for gold.
3. Gold's singular value is in its use as money.
4. Gold is not an investment; its higher price over time reflects the loss of purchasing power in the U.S. dollar - nothing else.

(also see: Gold Gains In Price Only - NOT In Value)