"5 Reasons Not to Buy Gold" - study by the Natl. Bureau of Econ. Research

[WiW]

Is it me or is looking at the inflation rate or the real interest rate of 1 country, then comparing it to a globally traded commodity a flawed way of thinking?

I actually tend to think that comparing things to globally traded commodities (that are always in demand, like food and gold) is a great way to hedge. Ultimately, we use stores of value (like currency and gold) to trade for commodities that we need, like food and other basic necessities. If your store of value can now buy half of the food it used to buy, on a global scale, either food everywhere in the world got more expensive or your store of value became cheaper. Either way, your store of value gets you less - which means its value drops. That's just how it is. In my opinion comparing to as many globally traded commodities is the best way to get a broad picture on the value of your store of value.

The global scale is to exclude droughts, famines, and other phenomena that skew value only locally and therefore not of interest as an encompassing measure.

Perhaps I misunderstood you, but why is such a flawed way of thinking?

[Spaceman_Spiff]

Is it me or is looking at the inflation rate or the real interest rate of 1 country, then comparing it to a globally traded commodity a flawed way of thinking?

I actually tend to think that comparing things to globally traded commodities (that are always in demand, like food and gold) is a great way to hedge. Ultimately, we use stores of value (like currency and gold) to trade for commodities that we need, like food and other basic necessities. If your store of value can now buy half of the food it used to buy, on a global scale, either food everywhere in the world got more expensive or your store of value became cheaper. Either way, your store of value gets you less - which means its value drops. That's just how it is. In my opinion comparing to as many globally traded commodities is the best way to get a broad picture on the value of your store of value.

The global scale is to exclude droughts, famines, and other phenomena that skew value only locally and therefore not of interest as an encompassing measure.

Perhaps I misunderstood you, but why is such a flawed way of thinking?

You misunderstood me.  I agree with your way of thinking.
But in the article they say things like " in the last three decades the real interest rate in the UK shows only a small correlation with gold price" and conclude that gold prices and real interest rates aren't really correlated.  What I am saying is that you have to take into account the other world economies and what the real interest rate in those countries is if you want to say anything decent about the correlation of gold with real interest rates.

[hashman]

I'll give you one more example, the Swiss Franc.  Why did the Swiss National Bank peg to the Euro if a highly overvalued currency is a good thing for an economy?

In Sept 2011:

The Swiss National Bank in effect devalued the franc, pledging to buy "unlimited quantities" of foreign currencies to force down its value. The SNB warned that it would no longer allow one Swiss franc to be worth more than €0.83 – equivalent to SFr1.20 to the euro – having watched the two currencies move closer to parity as Switzerland became a "safe haven" from the ravages of the eurozone crisis.

The SNB pledged to enforce a "substantial and sustained weakening of the Swiss franc", adding that it might move to an even lower exchange rate against the euro if needed.

"The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development," said Switzerland's central bank.

http://www.guardian.co.uk/business/2011/sep/06/switzerland-pegs-swiss-franc-euro

It's a global economy.  To SELL globally, you need to have buyers in other currencies be able to afford your product.  If the price of your product skyrockets (currency appreciation), it becomes more expensive to your buyers (importers) and thus, they will buy less.  This is basic economics.  If this was "beaten down" several times on this forum, then by all means, post some examples where an overvalued currency is good in the long-term for a country that conducts heavily in international trade.  My examples are above, I'll wait for yours.

Perfect example!  Thanks, I have been thinking about this one too.  

First, imagine yourself in the shoes of a SNB representative / employee.  You don't need to follow the news of the names and dates of the moves (yes there have been scandals in the news there) involved to realize, yes, of course you could have made a bundle on this deal and probably still can as the "infinite wall"  at 1.2 Euro is still there.  What are they going to do with all the euros they have bought?  They will still buy as many as you want to see at 1.2, by creating francs.  You asked why they are printing all these new Francs.  In my opinion free money is the real incentive there.      

Seems to me quite a sad day (ok, ~1.5 years already) for the strong history of the franc.  

To sell globally, yes you need to price your product competitively at its quality level.  If you are selling the product for bitcoins, gold, francs, euros, whatever, you will need to find a price range to deal with your customer.  As a company, if your assets become very valuable, how is this a bad thing?  Yes there are details, minimum wage laws, taxes, imports, etc..  but this quote:

The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy[/b] and carries the risk of a deflationary development," said Switzerland's central bank.

is a total joke imho.  "Massive overevaluation of the franc"  (sic) has been an incredible boon to the Swiss economy over the last century, while other central banks were busy looting the citizens with savings there seems to have been some measure of anti-corruption or something in place which has saved Switzerland.  CHF was worth about 0.25 USD 40 years ago.  You might notice that Nestle, Basel's bio-industry, watches, etc. have done just fine during this period of "massive overevaluation".  Sadly it appears that is over now, if the national bank is issuing such deceptive statements and following or making deals with other monetary bandits.  

The real losers here are the holders of CHF, and unfortunately the reputation of the banking sector there is losing as well.  On the plus side, the infrastructure is still some of the best in the world, there is a great educational system, a skilled and organized work force, and I expect the large fund of euros purchased with newly created francs will not be as easily looted as it would be in NY or DC.  



  

 

 

[Rassah]

If the United States of America economy collapsed then the world economy would collapse.

The world economy would suffer, sure, but it would definitely not collapse. We don't produce and buy all of the world's products. Many places in the Middle East, South America, and Africa will barely be affected, since they don't really do a lot of business with US, anyway. Plus USA is only 350,000 million people out of the 7 billion population. US is important, but it's not THAT important.

[CurbsideProphet]

To sell globally, yes you need to price your product competitively at its quality level.  If you are selling the product for bitcoins, gold, francs, euros, whatever, you will need to find a price range to deal with your customer.  As a company, if your assets become very valuable, how is this a bad thing?

As a company, if you lose 50% of your customers, how is that a good thing?

http://www.tradingeconomics.com/switzerland/exports

Exports in Switzerland decreased to 15547.20 Million CHF in December of 2012 from 19830.20 Million CHF in November of 2012.

That's a decline of 21.6%. 

Trade has been the key to prosperity in Switzerland. Exports accounts for 50% of its GDP.

Swiss main export partners are Germany, United States, Italy and France.

In other words, Euro, USD, Euro, and Euro.  And you still can't see why the SNB is trying to peg to the Euro?  I really don't know how I can make it any clearer. 

[twolifeinexile]

Is it me or is looking at the inflation rate or the real interest rate of 1 country, then comparing it to a globally traded commodity a flawed way of thinking?

BingGo!
Most people fall into this trap when thinking commodity vs. their own currency.On the other hand, USD's inflation rate is definitely a prime driving factor for gold. So as other global commodities.

[hashman]

And you still can't see why the SNB is trying to peg to the Euro?  I really don't know how I can make it any clearer. 

No, I don't see.  I'm not sure who the SNB players are, how they are connected with the big 7, what kind of relationships they have with the ECB or other banks, and what Swiss industries they work with.  Sorry, I'm just not connected enough to know more and heck if we did we wouldn't be posting here  

Yes, it sucks to lose your customers.  Yes there are difficulties in the Euro block economy of which Switzerland is a part.
No, I don't see any evidence to believe that having a strong currency is the reason for these problems. 
If you want to pay employees less, why not just lower their salary? 

[CurbsideProphet]

Yes, it sucks to lose your customers.

Ok maybe your'e getting it.

Yes there are difficulties in the Euro block economy of which Switzerland is a part.

It's starting to come together.

No, I don't see any evidence to believe that having a strong currency is the reason for these problems.

Damn, so close.  I provided you with examples, charts, quotes, articles....  If you don't see it I'm not going to waste anymore effort in trying to help you along.  If you're willing to bring something to the table, some modicum of evidence to support your argument, then maybe we can continue.  Otherwise I'm done.
 

If you want to pay employees less, why not just lower their salary?

  And with that, I'm out.

[amagimetals]

Although I'm a huge fan of Bitcoin, I was never really a fan of gold, and have usually advised people against buying it. Partly because of the shady overpriced pushers, costly storage, and difficulty of selling it later, and mostly due to studies that show that over the very long term, your gold investments will gain you maybe a 3% return. I believe stocks are a much better alternative.

If you see gold as an investment, then yes, there are many, better, alternatives to gold. However if you view gold as money, or a hedge against inflation, economic, and political turmoil, then you will see it makes a wonderful insurance policy. Gold (and silver). With this view, gold is seen as a protection for your investments, not an investment in and of itself.

Storage is only costly if you have someone else hold onto it for you. There really is no difficulty in selling it though, and I'm not really sure what you mean by shady overpriced pushers.

[hashman]

Damn, so close.  I provided you with examples, charts, quotes, articles....  If you don't see it I'm not going to waste anymore effort in trying to help you along.  If you're willing to bring something to the table, some modicum of evidence to support your argument, then maybe we can continue.  Otherwise I'm done.

You provided me with quotes from people who are printing money for themselves, providing not believable excuses on unscientific grounds why its ok for them to confiscate wealth of others.  Philipp Hildebrand said so. 

I can prove pirate will give the money back: "I will repay soon" he said.  Want a chart with that? 

I brought to the table counterexamples of your theory, which as I understand it was: an appreciating currency means difficulties for your production economic interests.  My counterexample was Switzerland, 1970-2010.  I specifically mentioned Nestle, watch industry, and biotech.

Granted, it's hard to impossible to make a controlled experiment in economics.  In this case, your hypothesis predicts great growth in industrial sector in Zimbabwe, Argentina, and Venezuela about now.  Also USA in the last 15 years should have shown great growth in export sector according to your theory.  Forgive me for not being strongly compelled.   
 

 

[CurbsideProphet]

I brought to the table counterexamples of your theory, which as I understand it was: an appreciating currency means difficulties for your production economic interests.  My counterexample was Switzerland, 1970-2010.  I specifically mentioned Nestle, watch industry, and biotech.

August 2011

ZURICH—Global food maker Nestlé fell victim to the soaring Swiss franc, which pushed first-half sales down 13%.

Profit was 4.7 billion francs, down 14% from 5.45 billion francs.

The franc, which has gained 24% against the euro and 32% against the dollar in the past year, has been an enormous drag on Swiss exporters. A strong currency hurts exporters because it means their prices are higher in overseas markets, making their products less competitive.

Straight from the Wall St. Journal, about your "counterexample" Nestle.  Now please stop talking, you're just embarrassing yourself.

[Rygon]

Gold is a safety net for the absolutely worst financial situations you could imagine. You might be able to use bitcoin in such a situation but good luck selling stocks during a real economic crisis or personal crisis.

I'm assuming you mean a worse situation than this?

Take what happened in Brazil between 1980 and 2000, for example, when — according to the International Monetary Fund — inflation averaged 250% per year. Over this two-decade period, according to the researchers' calculations, gold's price in inflation-adjusted terms dropped 70%.

I don't really believe a total collapse is possible. The reason is the world is just waaaay to damn big. If the USA, Canada, Europe, and China collapsed, we still have India, Africa, and all of South America who will gradly buy up their now much cheaper products.
But, even if there was a catastrophic world-wide collapse, would anyone even be interested in gold? And would bitcoin fare any better?

At first I do not believe this research until I see the data myself.
Second, a 70% drop is better than a 100% drop, which if you pick the wrong stock is almost a certainty in this situation. You might pick the right one but then how do you think your chances are if you don't? You plan on starving?

Of course there are other safety nets like land, real estate, food, tools and other machinery but none of those are as transportable as gold.
Bitcoin isn't really for the worst situations since it depends on infrastructure and it depends on the circumstances of course.

Another way to put it is that gold retained 30% of it's purchasing power over that time period, while the Brazilian currency retained pretty much 0%. Plus, worldwide, gold prices dropped for everyone by as much when accounting for inflation.

Also, the argument about gold being too volatile is factually incorrect. Gold has actually been less volatile than the S&P over the last 6 years, and has increased in value every year for the past 10 years.

I'm not a goldbug, but it has a much better risk to reward ratio than the stock market does.

[hashman]

I brought to the table counterexamples of your theory, which as I understand it was: an appreciating currency means difficulties for your production economic interests.  My counterexample was Switzerland, 1970-2010.  I specifically mentioned Nestle, watch industry, and biotech.

August 2011

ZURICH—Global food maker Nestlé fell victim to the soaring Swiss franc, which pushed first-half sales down 13%.

Profit was 4.7 billion francs, down 14% from 5.45 billion francs.

The franc, which has gained 24% against the euro and 32% against the dollar in the past year, has been an enormous drag on Swiss exporters. A strong currency hurts exporters because it means their prices are higher in overseas markets, making their products less competitive.

Straight from the Wall St. Journal, about your "counterexample" Nestle.  Now please stop talking, you're just embarrassing yourself.

So August 2011 is month which is a good indicator of performance 1970-2010?  How did Nestle do during the period I mentioned, in which the Franc had some 400% gain against the dollar?

Anyway lets talk about your WSJ quote, because I disagree with it anyway and it is a bit deceptive, seeing as in Aug. 2011 there was a small correction in price but the stock was still up ~50% YTD, and it implies companies would prefer their assets to depreciate in value.     

How about we rephrase it a bit:

The strong bitcoin, which has gained 1000% against the dollar, has been an enormous drag on Silk Road merchants and Alpaca Sock exporters.

Do you still buy it? 

Well I do admit there is a grain of truth in what you say, in that relatively wealthy nations have to pay higher labor costs and so find it difficult to compete in certain foreign markets with cheap labor.  Perhaps you will also admit that the motivation of individuals when robbing the wealth of a nation is not only to increase the competitive edge of the export sector in cheap manufacturing?   

[Seth Otterstad]

Another way to put it is that gold retained 30% of it's purchasing power over that time period, while the Brazilian currency retained pretty much 0%.

This is a common goldbug claim, and it is retarded.  Obviously gold performs better than fiat like USD that targets an inflation rate of 2-3% with periods of double digit inflation in the 1980's.  In the long run, fiat currency is the worst investment around.  It goes to zero by design.  To think this matters, you have to ignore the fact that no one "invests" in USD by hoarding it under their mattress.  People invest in productive assets like stocks.  Not only do stock prices tend to beat inflation, they get a dividend every year. 

You should not use gold to estimate inflation, unless you think we were deflating for 20 years before 2000.  Gold does not track inflation.

CurbsideProphet, nice job owning hashman.  People listen to Peter Schiff and think they know everything about economics.  They can have fun losing 40-70% of their money with that thinking:
http://www.businessinsider.com/2009/1/peter-schiffs-clients-got-hosed-this-year-too

[xxjs]

Recap of gold valuation.

The gold production (supply inflation) is currently about 2 % of the existing gold. Forces value down.

Some of that is ornamental. If gold should become money again, some of that would be used as money. Forces value down.

If gold should become money again, it will obtain exchange value, or moneyness. Forces value up.

The holding preferences. This is not predictable. Some will save more when they get more, some will consume more, it is different for every individual.

Number of individuals on earth increases. Forces value up.

Saving will reduce mass of gold used for money. Forces value up.

Investments will increase productivity, prices on goods go down. Price of money is the inverse of goods prices. Forces value up.

Higher value spurs more gold production. Forces value down.

Did I forget something?

Summa summarum, the future is unknown.

Difference to bitcoin:
a) Inflation of bitcoins available at a known rate, inflation will eventually end, after that loss will ensure diminishing number of bitcoins available.
b) Bitcoins are money now.

[Rygon]

Another way to put it is that gold retained 30% of it's purchasing power over that time period, while the Brazilian currency retained pretty much 0%.

This is a common goldbug claim, and it is retarded.  Obviously gold performs better than fiat like USD that targets an inflation rate of 2-3% with periods of double digit inflation in the 1980's.  In the long run, fiat currency is the worst investment around.  It goes to zero by design.  To think this matters, you have to ignore the fact that no one "invests" in USD by hoarding it under their mattress.  People invest in productive assets like stocks.  Not only do stock prices tend to beat inflation, they get a dividend every year. 

You should not use gold to estimate inflation, unless you think we were deflating for 20 years before 2000.  Gold does not track inflation.

CurbsideProphet, nice job owning hashman.  People listen to Peter Schiff and think they know everything about economics.  They can have fun losing 40-70% of their money with that thinking:
http://www.businessinsider.com/2009/1/peter-schiffs-clients-got-hosed-this-year-too

Could you please clarify how this claim is retarded? Yes, stocks were most likely better than gold during that time period, although I don't know because original article didn't provide that data. Lets look at how well stocks do against inflation:

http://www.advisorperspectives.com/dshort/commentaries/SPX-Dow-Nasdaq-Since-Their-2000-Highs.php

The last chart shows stocks invested at the high in 2000 still haven't recovered when taking inflation into the equation, and including reinvested dividends. That doesn't even include taxes and fees that are near impossible to avoid.

[fivemileshigh]

Keep in mind that there is a conflict of interest between the author and the subject.

[Seth Otterstad]

Another way to put it is that gold retained 30% of it's purchasing power over that time period, while the Brazilian currency retained pretty much 0%.

This is a common goldbug claim, and it is retarded.  Obviously gold performs better than fiat like USD that targets an inflation rate of 2-3% with periods of double digit inflation in the 1980's.  In the long run, fiat currency is the worst investment around.  It goes to zero by design.  To think this matters, you have to ignore the fact that no one "invests" in USD by hoarding it under their mattress.  People invest in productive assets like stocks.  Not only do stock prices tend to beat inflation, they get a dividend every year.  

You should not use gold to estimate inflation, unless you think we were deflating for 20 years before 2000.  Gold does not track inflation.

CurbsideProphet, nice job owning hashman.  People listen to Peter Schiff and think they know everything about economics.  They can have fun losing 40-70% of their money with that thinking:
http://www.businessinsider.com/2009/1/peter-schiffs-clients-got-hosed-this-year-too

Could you please clarify how this claim is retarded? Yes, stocks were most likely better than gold during that time period, although I don't know because original article didn't provide that data. Lets look at how well stocks do against inflation:

http://www.advisorperspectives.com/dshort/commentaries/SPX-Dow-Nasdaq-Since-Their-2000-Highs.php

The last chart shows stocks invested at the high in 2000 still haven't recovered when taking inflation into the equation, and including reinvested dividends. That doesn't even include taxes and fees that are near impossible to avoid.

You picked the height of the tech bubble to start your stock market graph.  If you are capable of predicting this well, you could make 640,000% return only making one trade every ten years since 1970.

http://www.peakprosperity.com/blog/80283/2012-year-review

Unfortunately, almost no one can make predictions this good, so we have to rely on long run averages.  Productive assets like stocks crush unproductive ones like gold in the long run.

[Monster Tent]

Another way to put it is that gold retained 30% of it's purchasing power over that time period, while the Brazilian currency retained pretty much 0%.

This is a common goldbug claim, and it is retarded.  Obviously gold performs better than fiat like USD that targets an inflation rate of 2-3% with periods of double digit inflation in the 1980's.  In the long run, fiat currency is the worst investment around.  It goes to zero by design.  To think this matters, you have to ignore the fact that no one "invests" in USD by hoarding it under their mattress.  People invest in productive assets like stocks.  Not only do stock prices tend to beat inflation, they get a dividend every year.  

You should not use gold to estimate inflation, unless you think we were deflating for 20 years before 2000.  Gold does not track inflation.

CurbsideProphet, nice job owning hashman.  People listen to Peter Schiff and think they know everything about economics.  They can have fun losing 40-70% of their money with that thinking:
http://www.businessinsider.com/2009/1/peter-schiffs-clients-got-hosed-this-year-too

Could you please clarify how this claim is retarded? Yes, stocks were most likely better than gold during that time period, although I don't know because original article didn't provide that data. Lets look at how well stocks do against inflation:

http://www.advisorperspectives.com/dshort/commentaries/SPX-Dow-Nasdaq-Since-Their-2000-Highs.php

The last chart shows stocks invested at the high in 2000 still haven't recovered when taking inflation into the equation, and including reinvested dividends. That doesn't even include taxes and fees that are near impossible to avoid.

You picked the height of the tech bubble to start your stock market graph.  If you are capable of predicting this well, you could make 640,000% return only making one trade every ten years since 1970.

http://www.peakprosperity.com/blog/80283/2012-year-review

Unfortunately, almost no one can make predictions this good, so we have to rely on long run averages.  Productive assets like stocks crush unproductive ones like gold in the long run.

What is worse is when governments force the population to invest in stocks through superannuation leading to the situation where you can lose 50% of your retirement savings because a stock market crash happens near the end of your career.