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The Gold Price Isn't About Gold!

Since 2000, the gold price has risen from $300 to $1,400 an ounce. There are several more important reasons than its being 'just a commodity.' The strongest driving force behind gold's rise in the last four years has been investment demand. As a commodity, it doesn't tarnish, it's a great conductor, and makes good looking jewelry. But these reasons are not the reasons why people invest in gold.

When they do buy gold, they lock it away. When they do keep it close, they take it out only occasionally to look at it. Most gold is never looked at or ever seen by its owners. It is stuck in a vault below ground. So if gold is not used or admired, why was so much of it bought so as to make the gold price multiply more than four times over this century and why will so much be bought in the future so as to make it likely to multiply a few times more in the future?

In short, the gold price is not about gold, but what the investor believes it to be and the value he assigns to it. More than that, it is about the gold investor and what drives him.

Reasons to Invest

Investment requirements are different for different investors. In gold, there are three types of investors.

  1. The first type is one who invests for profit. His aim is to buy low and sell high. He usually uses technicals [charts] and other similar tools to guide him to do this well. He will use currencies as his measuring rod. So to buy for $100 and sell for $200 would mean to make a 100% profit. The assumption is that the dollar's value will remain constant. Whereas, the reality is that when one buys gold, one sells the dollar and when one sells gold one buys the dollar [Remember that the writer of the dollar note stated that he trusts in God - which God?]. Nevertheless, since the last war the dollar, equities and the plethora of different investment instruments available to the U.S. investor have served the purpose of building up a store of wealth that can take care of him in his old age or be left to his heirs. The mindset of the developed world investor is to use his education and investment skills to build up profits to create his wealth. But more than that, he uses and implicitly trusts financial institutions to support his quest for wealth.
  2. The second type of investor has the same eventual aim of creating wealth for his old age or to leave to his heirs. However the path to that wealth is not through the use of profits to create more, but primarily through his own separate endeavors taking profits from them and investing in a safe place such as property or gold--two assets that represent a store of wealth not associated with profits, but simply a recognized store of wealth that will retain its value throughout his life. More than that, he puts his wealth out of the reach of financial institutions and his government.
  3. The third type of investor is government, which is completely different today, in that it wants gold to sit in his reserves on a permanent basis, with no profit in mind at all. Government holds it for the best reason and that is to keep things going on the dark rainy days, when its own currency just won't do the job it should and to counter the swings in his other currency holdings. It is used as a measure of stability in his reserves and gold helps to get that. Apart from a 40 year courtship without gold at center stage, gold has always been internationally respected and valued as money. It is still, as the central banks now confirm, through the cessation of their gold sales and by those who are persistently buying irrespective of the price. It is the central banks alone that will ensure that the gold price will continue to rise, because it is not about gold itself, but about gold as money trusted internationally by people and governments.

The profiteer may well find the second investor's approach too simple, until he looks back over the last ten years and measures the growth of the value of gold against that of equities. The second type of investor usually comes from the world east of Europe, where corruption, changes of government and turmoil have left a people with little trust in institutions and a great deal of self-sufficiency. Until a few years ago the west could trumpet that their institutions were part and parcel of wealth creation. That is changing now. While the east has far less institutional cohesion as a result of their past, they have never lost their belief that gold is the real money. The west is headed back that way now. And the central banks are now either holders or buyers, but not sellers. Why?

Why Gold?

Gold is money in a crisis when nothing else can be trusted or relied on. It retains it value when enemies exchange it. It is an international asset. A man from China will value it as much as a man from South Africa or Canada. Its price is set in London and used in the far reaches of the earth. There are no unfulfilled obligations attached to it. It is free from all national restraints that come with paper cash. Today, most importantly it reflects no national economic fundamentals and is not under the control of any individual or group of nations. It is free of government!

Nothing else fits that bill, nor will it. As we watch the gold price move like a flowing tide subject to the ebbing and flowing waves of price movements, we are intrigued that there are still so many commentators that believe it is a metal in a bull market that will inevitably be followed by a bear market. We do not subscribe to that opinion. We feel that mankind is moving back to a period of time marked by uncertainty, instability and a tremendous shift in world power, when debt obligations issued by individual governments, called currencies will have a relative value. Gold on the other hand, will reach the point where it will be an arbiter of value. Even the head of the World Bank has suggested that role. Despite the restraint it puts on all governments, the pressure we see ahead for the world will ensure that more and more people will come to consider gold as real money.


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