Why Buy Gold?

I’m seeing a lot of questionable advice on “buying gold”. I call this highly questionable, because there are much better investments around then gold or silver. Food prices will double, triple and even quadruple very soon. Gold, on the other hand, is already fairly expensive and is expected to double. If it does, it will become unfordable for many people, lowering it’s actual demand. But there are some things, no matter what their cost, will always be in demand…

You can’t eat gold. And you can’t buy food with gold (no, you really can’t, try it and you will go to jail). Gold and silver has to be converted into fiat money to be used, which is on a downward devaluing spiral. And food prices are going up, up and up. So how can gold make a good investment?

There is the tired argument that gold “is real money”. But this isn’t really true, not anymore. Gold was real money at one time, for thousands of years, but gold is not real money today. It’s not exchanged among buyers and sellers as real money either (not in the real world where us paupers live).

This is the same with silver. Both gold and silver have been confiscated as a means of protecting the fiat money system in the past. This could happen again.

So why buy gold? Gold is valuable as a means of concentrating wealth in a small package. It can be conveniently moved around in small quantities and represent a fair amount of wealth. But it must almost always be converted back into fiat dollars for actual use, making it subject to the same inflationary / deflationary cycles as the fiat money that designates its real “current” value.

Obviously, I’m not a fan of gold or silver, since I’m not advocating these metals as investments. I believe that there are much better investments then gold or silver which exist outside of the limited supply / demand of precious metals and who can afford them.

Gold or silver cost their current market value (plus small commission / minting fees). Held long enough, these metals either increase or decrease in value when converted back to fiat money. However, at the same time, the dollars these metals actually represent will either buy more, or less then before (probably less). Therefore, precious metals like gold or silver must be sold on the “spike”, when it’s worth more then the inflationary / deflationary adjustment to dollars.

What a pain! You’re having to time the market correctly to actually appreciate any real gain and to prevent any real loss. Meanwhile, you wind up “sitting” on your wealth, literally waiting day by day for the right timing in which to sell, convert to dollars and buy something you need.

To me, this makes no sense at all, since there are much better ways to protect your wealth.

Gold or silver is only worth what the market say’s it’s worth, and if the past several decades are any indication, it’s a volatile, even manipulated market. Who wants to play in that game? If the rules are rigged — why even bother?

I cannot prove to you that it’s rigged, but I strongly suspect that it is. I feel exactly the same way about the stock market by the way, being a totally rigged game also. If there are “winners”, there must always be “losers”. Usually, it’s the little guy who has not much to spare, but tries his or her hand at “winning”. But stories abound of those who sat on their investments only to watch them vaporize, sometimes rather quickly (overnight in some cases).

Isn’t this all rather risky then? I’m not a financial consultant (obviously!) but there are better ways to appreciate your wealth. Some commodities climb very steadily up and up without fail. Real estate used to be one of these, but not anymore. Right now, a deflationary cycle has hit the real estate market and a glut of property is on the market at prices lower then what’s actually owed on their loans. Those caught in this trap are going to have to either pay off the difference, possibly file bankruptcy or try and sit on the property until (and if) it appreciates in value again.

The subprime mortgage failures will be getting much worse in the winter of 2008 and all through next year. This means that there will be many more properties on the market as borrowers can no longer make their minimum monthly payments. These owner-defaults will cause more lender defaults, causing a domino effect throughout the entire financial community.
Added to this volatile mixture is the decline US dollar. Your dollar buys less now then ever. It’s even buying less then the Canadian dollar!  There is also some strongs hints that the US dollar will soon be worth less then the Mexican peso!

The cost of living is also going up at the same time. Essentials of everything are costing more then ever. The benefit of mass production and consumer costs has “bounced”, reaching it’s lowest point and now is climbing back up due to rising energy costs, affecting transportation, manufacturing, mining, shipping and production. This means that your essential needs, such as food, clothing, housing, water, electricity, transportation, medicine never goes down, it only goes up, up and up.

Peak energy (peak oil) will have a dramatic impact upon the cost of living, as will global climate change. Taken together, which is exactly how it is now playing out, will be devastating on the idea of “investment”. The entire financial world is changing as a result. What used to be a solid, sure investment, such as real estate, is no longer a guaranteed strategy.

This is also true (imo) of precious metals. Food is a much better investment, as are almost all consumable commodities, including other consumable metals (copper, nickel, molybdenum). Even lumber would be a better investment. We’re seeing food price increases of 100% – 300% in a single year. Gold or silver doesn’t even come close to matching this increase in that span of time. The reason this makes food so valuable as an investment vehicle, is it is now a absolute certainty that it will cost more next year.

One caller told me he was getting about a 4% return on his IRA. That’s less then inflation! From an investment standpoint, you might as well be tossing money into your woodstove to keep warm. Speaking of which, firewood around here has jumped 50% in price in less then two years.

The reality is, consumable commodities are a far better investment as energy costs and availability (affected by drought and climate change, population growth / depletion) then gold or silver will ever be.

But don’t try telling this to the gold bugs. They’re convinced that their stash will make them rich someday. I doubt it. I don’t need gold or silver — but I do need food, water, shelter, housing, medicine, safety and transportation, and so does everyone else.

More reading: Dollars and Gold