The Truth About Gold That Neither Bugs Nor Bulls Like to Admit

Let’s talk about Gold as an investment.

Gold is one of the most divisive asset classes on the planet. Stock-centric investors such as Warren Buffett think it’s a worthless “pet rock” that fails to appreciate in value. Gold bugs, on the other hand, revere the precious metal with an almost religious-like ferocity.

Both of these views are misguided particularly when you apply them to a framework that involves TIME.

The fact that Buffett accrued his great fortune during a brief period in which the financial system was based solely on fiat currency has lead him to view Gold with contempt. However, the fact remains that Gold has been a storehouse of value for 5,000 years.

Based on this alone, Buffett’s ideology is myopic. To sneer at Gold is to sneer at the history of money.

However, Gold Bugs are no better in that they focus too much on this “5,000 year metric.” The fact remains that since 1971, Gold has ceased to operate as a storehouse of value in the same way as it did during the other 4,962 years.

I’m NOT saying Gold is no longer a storehouse of value… I’m saying that Gold no longer stores value as it did PRIOR to 1971.

The reason for this concerns the fact that the world is now in a completely fiat-based financial system in which Central Banks can print tens of billions of their currencies at a whim. This opens the door to abject manipulation of Gold prices.

Historically, Central Banks printed actual physical currency. That is no longer the case. Today, 99% of wealth is digital. When the Fed or some other Central Bank prints money, they are not actually firing up a printing press; instead, the entire process is digital in nature and simply involves moving electronic currency from one bank account to another.

Because of this, it is much easier for Central Banks to manipulate asset classes by printing money and then using it to buy or sell futures in those assets. We know this is the case because the futures exchanges openly admit they have programs in place through which Central Banks do this.

An alternative scheme involves Central Banks providing short-term loans to large investment banks, which then manipulate asset classes for them. Thanks to several recent lawsuits, we know for a fact this regularly occurs in the Gold market.

For this reason, Gold no longer acts as a storehouse of value in the same way as it did during the previous 5,000 years. I’m not saying Gold doesn’t maintain purchasing power better than other investment classes, I’m merely pointing out that it no longer maintains purchasing power in the same way as it has historically. And for this reason, Gold bugs, particularly those that hold the precious metal up as a kind of religion, end up perennially frustrated (its been 40+ years since Gold acted as it is supposed to… that’s the length of an entire investment career for some).

So… if Gold is NOT a “pet-rock” as the Buffett crowd would claim… and it’s NOT the storehouse of value that it one was…. What is it?

Gold is a risk asset that trades based on the true cost of moneyas illustrated by “real rates” (Treasury yields MINUS inflation protected Treasury yields). Remember, in our current financial system, the yields on US Treasuries represent the “risk free rate of return.” When you account for inflation by subtracting the yields on inflation-protected Treasury bonds from normal Treasury yields you arrive at the TRUE cost of money.

THIS is what Gold tracks as the below chart reveals.

Having said all of this, the signs are now pointing towards Gold and other inflation hedges rising rapidly as inflation takes hold of the financial system.

Real rates have staged a CONFIRMED breakout from a massive five year triangle pattern.

This is EXTREMELY bullish. And it tells us that HIGHER real rates are coming in the future.

Put simply, BIG inflation is on its way. And smart investors are already taking steps to profit from it..

On that note, we just published a Special Investment Report concerning a FIVE secret investments you can use to make inflation pay youas it rips through the financial system in the months ahead

The report is titled Survive the Inflationary Storm

We are making just 100 copies available to the public.

To pick up yours, swing by:

https://www.phoenixcapitalmarketing.com/inflationstorm.html

Best Regards

Graham Summers

Chief Market Strategist

Phoenix Capital Research

Comments

Sweet Cheeks Sat, 05/12/2018 - 16:57 Permalink

Gold is insurance. You don’t buy it as a short term investment in a world wide economy run by central banks.

You buy gold to bribe the border guards to get the hell out of a dodge when the SHTF and for seed money to start over after the die off.

Now that we settled that, the bigger question is just where are we going to go with our gold, silver, brass, lead and our AK 47's? 

 

lasvegaspersona Lost in translation Sat, 05/12/2018 - 18:27 Permalink

When governments define the value of their currency in terms of gold they have removed the value of gold to function as insurance in terms of that currency. They can jus print more and lower the ratio of gold they hold ....So it means that in the gold standard and gold exchange standard gold really did not work then either. Gold was $20/oz even as the dollar lost value continuously. Gold functions only when it is divorced from the fiat system. In a free floating currency, worldwide, with free mobility of gold...then it will shine like it never has before.

In reply to by Lost in translation

galant lasvegaspersona Sat, 05/12/2018 - 21:46 Permalink

You confuse a gold standard with a gold exchange standard.

The essential difference between a gold standard and a gold exchange standard is that with the latter, the monetary authority has added flexibility to expand the quantity of money substitutes in circulation without having to buy gold.

The gold exchange standard evolved in the 1920s as America and Britain went to the aid of European countries, struggling in the wake of the Great War.

It allowed the expansion of national currencies under the guise of them being as good as gold. They were not.

In modern terms, it was as different as paper gold futures are to the possession of physical gold today.

In reply to by lasvegaspersona

bombdog Joe Trader Mon, 05/14/2018 - 03:29 Permalink

Anyone can be bullish on gold, but it takes religious devotion to insist that all money must be commodity money, namely based on a specific mass of a precious metal as the unit of account. Only then can we be truly free from the tyranny and evil of government borrowing in such size that it even pledges the future output of the unborn as surety to the money changers.

Apart from that, gold bugs are the same as gold bulls.

 

In reply to by Joe Trader

Bluntly Put Sat, 05/12/2018 - 18:11 Permalink

The fact remains that since 1971, Gold has ceased to operate as a storehouse of value in the same way as it did during the other 4,962 years.

As long as the fiat system continues to work. However, the fiat system requires exponentially increasing debt to continue to roll past debts.

Ask yourself if that system can continue indefinitely

And, (2018 - 1971)/4962 = 0.948%

That's not a very big percentage to base your thesis.

666D Chess Sun, 05/13/2018 - 15:39 Permalink

Gold is not an investment. Gold is money. That's it, when you make profits on an investment, a certain amount of those profits should be turned into gold. 

Lie_Detector Sun, 05/13/2018 - 18:34 Permalink

Every single "central bank" (that I know of) and many other smaller banks own gold and silver. They own precious metals for a reason. They do not print trillions of dollars, Euros, etc. and keep "paper/rags" in their vaults. They keep metals for a reason and so should every person who can afford some, for the same reason.

Conax Sun, 05/13/2018 - 19:12 Permalink

Modern investors use investments for income in lieu of (trigger alert!) working for a living.

This is why the modern investor hates gold. He can buy lots of gold and will still have to feed himself the old fashioned way. Sweating it out, having to get results and produce quality products or services. So in his view, gold is a pet rock.

Gold is a savings account, a set aside for troubled times or an asset to leave to your progeny.  Buying gold in no way lets us off the hamster wheel.  We will still need to (trigger alert!) work. PMs collectors happily work and enjoy their chosen professions.  They just tend to swap the earned fiat for real money. With zirp, why bank the hard won fiats? Convert it.

 

Tonesvette Sun, 05/13/2018 - 22:06 Permalink

Gold is ok as a small store of wealth to tide one over during a patch of illiquidity.  I think credit is better and less expensive.  Smart investors hedge inflation risk with real estate.  Plus you can leverage it.  That said, we are in the early stages of long expansion.  Rents are way up.  Property values are beginning to follow.  But easy money and stupid speculation are yet to come in this new boom / bust cycle.  I give it until Trump is just about to finish his second term.  In the fall of 2023 it will be hot time in the old towne agin'

 

honestann Sun, 05/13/2018 - 23:08 Permalink

Correction:  Gold has not "acted as it should" since human morons started accepting paper receipts for the gold someone else supposedly held for them.

The only way for gold [and silver] to behave as it should is for people to always exchange real, physical goods or goodies for other real, physical goods or goodies.  Those goods need not be gold or silver, they can include any real, physical goods and goodies.  But what must be excluded is paper receipts or other paper instruments... most definitely including debt instruments.

Gavrikon Mon, 05/14/2018 - 01:58 Permalink

Gold will be manipulated until it can no longer be.  Then, our overlords who have been hoarding it will use it to multiply their own massive holdings of properties, what have you.  Those who hold relatively small amounts will be lucky to simply survive, and maybe thrive to a slighter extent.  We'll pick up the crumbs dropped from the tables of the rich and powerful.  One prays that will be enough.