The Trouble with Gold

My accountant and I have an ongoing argument.

He tells me that gold is money. I point out that gold is NOT money… at least, not today.

I understand that gold has been used as a medium of exchange and storehouse of value for thousands of years, but gold is not being used for that purpose today.

For better or worse, and we know that it is mostly worse, the governments of the world linked themselves to gold through the U.S. dollar back in 1944. Then one by one they de-linked from the U.S. dollar, with the U.S. itself de-linking from gold in 1971.

There is no major country where gold is a recognized form of money today. It could be tomorrow, but it is not today. So as far as the definition of money is concerned, gold fails in the “medium of exchange” category. That leaves storehouse of value.

Does Gold Really Store Value?

Can it really absorb the units of labor that a person has expended on the job, and keep the value created from that labor in a safe place until the worker is ready to exchange it for goods and services? Judging by the last few years, the answer is yes!

In fact, gold has done a much better job of storing value than any currency has, this can be seen by looking at the prices of commodities, which go up when among other things, the value of currencies decline.

So What’s the Problem with Gold?

The problem is that beyond some very limited uses for adornment and industry, gold is used for nothing. It is not consumable, edible, or an input of any kind. Gold just sits there. Right now gold is relegated to the role of storing value, and gold’s ability to store value is determined by…whatever investors think at the moment.

Consider that last statement – the value of gold is whatever investors think it should be at the moment. Gold is not exchanged for wheat, oil or coffee.

The value of gold is something of a mystery that is solved each day as investors look across the economic landscape and determine how comfortable they are with the U.S. dollar, the yen or the euro.

If it appears that governments are being responsible with their currencies, then the value of gold tends to fall. If governments are pursuing reckless policies, say, printing trillions of new units of currency to pursue some unreachable goal, then gold tends to rise. This is where we have been. The question is, “Where are we headed?”

Over the last several years we have seen things that seemed impossible. The Federal Reserve printed trillions, the ECB recently printed and lent over 1 trillion euro, and the Japanese, well, they have been printing like crazy for two decades.

The outcome has been a wild ride higher for gold. However, none of that means that gold will zoom to $2,000, $2,500 or even $3,000. What would seemingly drive gold to such heights would be a continuation of these policies.

What if instead of printing more currency, governments allow the restructuring of debt that economies around the world so desperately need?

What if the events in Greece, which just secured a 75% write off of existing debt, are the warm up act for debt restructuring across Europe?

What if the $25 billion bank lending deal, which requires the largest lenders to modify loans and write off principal, actually serve their purpose?

All of these things would, after the dust settles, make currencies more valuable, which would drive down the value of gold.

Given that the gold rally is several years old at this point, and that countries around the world are chipping away at their economic issues, now is the time to pare down some of your gold holdings that have appreciated so nicely. When tomorrow comes, who knows what people will think gold is worth?

Best of success,

Rodney Johnson
Editor, Survive and Prosper

P.S. We believe that the sentiment towards gold will turn down sharply in the coming years. In fact, we’re forecasting gold at $750 by the end of 2013. Harry and I have explained, in detail, why and how we see this happening. To find out how you can gain access to this information, check out Harry’s latest note here.

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Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.