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Keith Weiner

Keith Weiner

Sprott Money

Weiner attended university at Rensselaer Polytechnic Institute, and earned his PhD at the New Austrian School of Economics. He blogs about gold and the dollar,…

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The Root of Gold Conspiracy Theories

Gold Nuggets

Originally posted at Sprott Money on November 10, 2015.

Most people who own or trade gold have a higher price in mind, a price determined by what they think the metal is worth in dollar terms. That's normal. However, some make a leap from the fact that gold doesn't trade at this price today, to belief in manipulation. Short sellers -- who are sometimes supposed to be illegally profiting, and sometimes said to be not-for-profit -- come in to the market and sell the metal down. Or so the theory claims.

This theory is not true, and I plan to show the data to prove it in a future article. For now, I want to discuss the fallacy at the core of it.

The error is dollar thinking.

What do I mean? Simply, most people assess the value of something based on its price in dollars. If nefarious parties could somehow suppress the price of gold, then they could undermine its value. That would be an evil act. How could one not feel something, at such a crime against the natural order? It's personal too, an attack on your very wealth. You buy gold to protect yourself from a likely dollar collapse, and instead find you are losing your wealth. You're forfeiting it to the very monetary planners from whom you thought gold would protect you from in the first place: the central banks.

Let me suggest that this is the wrong way to think about it. Gold does not go down (or up). Gold cannot be properly measured in dollars.

Let's start with an example of measurement. Suppose you're cutting some boards to build a house. You use a meter stick to tell you the length. For example, a board is 3 meters long. You would never wonder how many boards long a meter is. That's because a board is not a good measure of length. The length of one board is not the same as the length of another. And, the length can change, for example by cutting it with a saw. The meter doesn't change, but boards do. Therefore, boards are measured in meters.

The same applies to economic value. The value of the dollar varies from one day to the next and, of course, it falls over long periods of time.

So the question is not: how many dollars is an ounce of gold worth? The question is: how many ounces is a dollar worth? Far less than an ounce, it's about 27 milligrams.

When you look at this way, things becomes clearer. It's the dollar that goes down, not gold that goes up (the dollar can also go up, as it has since 2011, due to pressure on debtors).

One implication of this is that a rising gold price does not provide a profit to gold owners. Sure you have more dollars, but each dollar is worth proportionally less. For example, if the price of gold in dollars goes from $1,110 to $2,220, then that's just the mirror image of the dollar going from 28 to 14 mg gold.

Conversely, if the price of gold falls, it's just an increase in the dollar. So what? If the dollar goes up, it is not important (or permanent). Why worry if the price of something you don't own goes up? I didn't own bitcoin when it went up from a few dollars to $1,200. I didn't worry about it, either.

Many gold owners do worry about a rising dollar, which they think of as a falling price. Why? They say the dollar will soon be worthless (it will be worthless one day, but not as soon as many say), so they buy gold. And then they get upset when the collapse doesn't happen, and the dollar strengthens.

The dollar collapse is just their backstory. The real reason they buy gold is to sell it. They want more dollars, no matter what they say about hyperinflation. They want profits, which they think of in dollar terms. As I said above, you can't profit from a rising gold price (unless you use leverage).

So cheer up. Most people do have a dollar income and assets. A dollar collapse will be a disaster, but a flat or falling price of gold supports the dollar, and hence, most people.

If you have a dollar denominated income or assets, then here is a simple step you can take. Measure it in gold. For example, suppose you have real estate and stocks totaling $1,100,000. Divide that by the current price of gold -- about $1100 -- and you are worth 1,000 ounces. If it goes down next year, despite hard work and risk, then you have become poorer. You would actually have been better off simply holding gold -- even if your net worth goes up in dollar terms.

There's no reason to sweat a drop in the gold price or cheer a rise.

 

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