Gold’s Myths and Realities

 There are critics to gold. But most of the criticism has no foundation and amounts to little more than good propaganda for those who are afraid that strong gold demand will divert investor interest from the equities markets and the dollar. Most of the standard criticisms must not be new to you since you can find them on the radio and newspapers all the time. Here are concise and complete rebuttals – the last words on the merits of gold.

Myth: Gold is not a good portfolio item due to the fact that it doesn’t pay interest.

Reality: The fact that gold doesn’t pay interest is its greatest strength. The return on your gold would be dependent on the performance of another person or institution if it were to pay interest. This is the case with paper assets such as stocks, money market accounts, bank certified deposits, and even bonds. The contractual relationship between the creditor and the debtor can be a paper asset’s greatest strength. But it can also be its greatest weakness. An additional and often complicating factor is that paper assets are directly affected by the performance of the currency in which they are denominated.
Gold on the other hand, is a stand-alone investment independent of government largess or the performance of another institution or individual. This is gold’s greatest strength. Although gold doesn’t pay interest directly, it is interesting to know that over any extended period of time the interest rate of currency becomes imputed in the price. During inflationary periods, the appreciation in the price of gold is the greatest, and so is the rise in interest rates. During deflationary periods, the gold price tends to stay flat while interest rates plummet. Gold historically looks for a price level that takes into account the inflation rate of currency. This compensates for its non interest-bearing status.

Myth: Gold is just another commodity, like pork bellies.

Reality: Gold Trades on the commodities exchanges along with pork bellies and the other commodities, but here is where the similarity ends. Unlike other commodities, which are produced primarily for consumption, gold alone is accumulated and saved. It is also the only commodity used in the form of money to facilitate future consumption. Most of the gold ever produced still exists in this time in one form or another. It is impossible to say the same thing about pork bellies, sugar, or soybeans. The gold you could possibly purchase someday might have been part of the treasury of the Roman Empire, it might have also been used by Marco Polo in his first visit to China, or it could have circulated as currency in the Old West. This money function, called asset preservation of gold, separates it from the commodity complex and gives it a special place at the very top of the value scale. The people who relegat gold to the status of “just another commodity” usually do so because they either are afraid of gold or do not like to compete against it. By denigrating it, these people hope to subdue public accumulation – an exercise in futility. Gold is the enduring commodity.

Myth: World governments in conjunction with the central banks control the price of gold. Their intention is to hold that price down.

Reality: In each instance in modern monetary history, when governments and central banks (this includes our own central bank and federal government) tried to hold down the gold price, the price was on the verge of moving substantially higher due to the inflationary policies these very institutions were encouraging. Their intent to hold down the price of gold was futile, they only delayed the dominant, underlying trend. As a matter of fact, government interventions in the gold market in the past (most recently in the 1960s and the 1970s) have amounted to no less than solid indicators that gold’s price was about to go substantially higher. Not being able to control gold, to the consternation of some central bankers and governments, they must also answer ultimately to what the gold market is telling them. When it comes to currency value, gold is the master of all and a slave to no one.