Tuesday, January 15, 2013
There are many misconceptions about gold; Saville addresses two of the most prevalent.
First misconception: Gold's purchasing power is roughly constant over time, meaning that changes in its price are almost solely due to changes in the purchasing power of the money in which the price is denominated.
Technical analysis shows that an ounce of gold has about eight times more purchasing power today than it did in 1971, when Nixon closed the gold window, and that gold’s purchasing power remains in an ultra-long-term upward trend.
This is because cost of creating money out of nothing is much greater than the reduction in the purchasing power of money. Monetary inflation can make things look better in the short term, but it leads to the long-term destruction of wealth.
When the gold standard was abandoned in 1971, the average rate of monetary inflation increased. Economic progress slowed, and desire for savings in terms of a monetary asset that couldn’t be depreciated at the will of banks and governments increased.
Second misconception: Owning gold is pointless because it is a sterile, non-productive asset.
Most people have a range of investments plus some cash savings. While gold can be a good investment, it is the cash component of a portfolio that gold bullion is tailor-made to occupy. Gold doesn’t compete with companies such as Wal-Mart and Apple; it competes with dollars, euro, yen and other national currencies.
So the question some value investors have asked in their efforts to disparage gold ownership (“What would you rather own—a hunk of metal that does nothing but sit in a vault, or all of these phenomenal businesses?”) should be re-phrased as:
“In which form would you prefer to hold your monetary savings: currency that banks can create in unlimited amounts out of nothing, or a metal that has been used as money for thousands of years and whose supply never increases by more than 2% from one year to the next?”
The answer, of course, is “the metal,” because the Fed believes counterfeiting money can strengthen the US economy, and the other major central banks are no better.
Posted by Unknown at 2:45 PM