Gold prices have hit two-year lows in 2013 – so what's next?

If you are "investing" in gold right now you are probably not happy. The gold ride for gold and silver has been brutal. Currently it is trading under $1,400 which is a 26% decline from September 2011 high of $1,900.

As I mentioned on an article I wrote August 2011, Gold Is Not An Investment, 

Gold does not qualify as an investment since it does not generate income by itself when we put our money and capital at risk to acquire it. Gold has no real intrinsic value, its value is the one assigned to it. I understand there is a market for gold, just like there is a market for real estate and stocks. Gold is raw material, it does not produce income, no dividends, no cash flow. Gold is a chunk of metal while a stock is ownership in a income generating company. The performance of a company can be tracked and projected, you cannot do so with gold. The price of gold is speculative. Commodities are regulated by offer and demand, the challenge for gold is that we do not know how much gold really exist therefore the price assigned is speculative, thus it is not an investment. 


Right now there are a lot of people that are confused and wondering, What now?

The problem we have is the speculators and traders going around over-selling the idea of "buy gold now", which in turn it inflates the price and creates a bubble just like the one created for real estate. However, intelligent investors buy gold and silver to accumulate for the long term. They understand that gold is not an investment; it is money. Also, an intelligent investor understands that it is good to hold money as this world moves closer towards global bankruptcy and default.

You must stop playing the rigged casino where prices of precious metals are being controlled by a few by expanding or contracting the supply using ETFs. Ask yourself, why did the price of gold and silver took such a sharp dive last week? Some claim that "improved economic conditions", really? Others claim that the reason for the decline can be attributed to a report issued by Goldman Sachs last week that pointed to lower gold prices. 

When looking to hedge your money against the risk of inflation/devaluation you must be careful about doing so through the most popular gold ETF, or exchange-traded fund, known as the GLD. ETFs negate the fundamental incentive for hedging your cash supply since individuals cannot take possession of their investment or have it segregated or accounted for. Also, ETF is not an investment in actual gold, it does not promise that any gold is in its trust, and the legal structuring of the ETF makes it impossible to determine if its gold is being leased, as it cannot be audited. GLD’s own prospectus, states that there are no written contractual agreements between subcustodians and the custodian or the trustee, thereby making legal repercussions impossible should there be misuse or loss of leased gold. The prospectus also says that “failure by the subcustodians to exercise due care in the safekeeping of the Trust’s gold could result in a loss to the Trust." This means that if gold leasing is a component of the ETF and a default occurs, investors are extremely vulnerable and could potentially lose all their money if that metal is unable to be replaced. This is the reason why I recommend that the portion of your portfolio that you are holding in gold by physical gold. 

Is it possible that a small group of people are trying to manipulate the gold market to suppress the price of gold making illegal profits at the expense of ill advised investors who buy high and sell low. By suppressing the precious metal now an illusion of hope can be provided to the paper dollar.

There is one monetary principle that you must understand; gold is money, and the dollar is credit-of declining quality. So why do you measure your the "gains " in dollars? Why do you sell your gold for dollars?

A Global Gold Standard

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan (1966)

It is clear by now that deficit spending is simply a scheme for the confiscation of wealth. It doesn’t matter whether that deficit spending is in the name of providing benefits to certain people in society or depriving certain people of benefits. It is still confiscation whether done in the name of aggression or in the name of benevolence. It seems that Mr. Greenspan knew all along that there is no safe way of protecting wealth other than gold. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.

Money is the common denominator of all economic transactions. Money serves as a medium of exchange; it is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving. Can paper money backed by thin air do that?

It is amazing that the same man who was quoted above became the "US Chief Officer of Plunder" aka Chairman of the Federal Reserve. He is also known as “The Maestro” by his admirers in the media. However, lately his popularity has lessened as his policies have been linked as the source of our current economic problems. Maybe he should have preached his original principles during his tenure as a Chairman of the Federal Reserve rather than become a puppet of the State and a part of the problem. 

Gold is Not an Investment

Today let's talk about a subject that seems to be touchy to some people specially those that are "investing in gold". Gold is not an investment. Now before you close the window and start sending hate mail, I suggest that you read the rest of the post. The basis of my statement is founded on the definition of an investment. An "investment” is defined as the commitment of money or capital to purchase financial instruments or other assets in order to gain profitable returns in the form of interest, income or appreciation of the value of the investment. Through this transfer of capital, in the expectation of a profit, an investor gives up capital and puts it at risk. The investor receives a return in dividends or interest as compensation because capital is at risk; investors may get back less than they invested, or they may get back nothing at all.

Gold does not qualify as an investment since it does not generate income by itself when we put our money and capital at risk to acquire it. Gold has no real intrinsic value, its value is the one assigned to it. I understand there is a market for gold, just like there is a market for real estate and stocks. Gold is raw material, it does not produce income, no dividends, no cash flow. Gold is a chunk of metal while a stock is ownership in a income generating company. The performance of a company can be tracked and projected, you cannot do so with gold. The price of gold is speculative. Commodities are regulated by offer and demand, the challenge for gold is that we do not know how much gold really exist therefore the price assigned is speculative, thus it is not an investment.

The problem I see is when people are putting assets at risk in the gold rush of 2010 thinking that they are investing. Investments are made by evaluating underlying value. Speculative bets are made by looking at the price of something and simply hoping the price goes up. Investing is about value; gambling is about price. In reality they are speculating. They are betting on how high the price of gold will go. There is no financial analysis to project the future income that gold will generate for you.

However, I do consider gold to be an important component of a financial portfolio. It can be used as hedge against inflation and a monetary collateral to sustain the value of currency. If you want hold some gold for diversification. In the unlikely event that paper currency becomes worthless some day gold and possibly silver would resume a role as a medium of exchange. Gold is money. Unlike investments, gold does not generate wealth, gold preserves wealth.

Right now, too many people are jumping on the gold bandwagon and really not asking why the price of gold is increasing. Gold’s main use has almost always been as money. However, gold’s secondary uses are growing in importance. Due to its physical characteristics, it’s a high-tech metal. So in todays technology driven society we are looking at gold beyond it main role of currency (gold is the most resistant to chemical reaction, the most ductile and the most malleable of all the elements, and it’s an exceptional electrical conductor), which in turn has increased its demand. Conclusion, increased demand drives the price of the commodity up. However, that does not change the fact that gold is raw material and by itself does not generate income. There is no certainty of the amount of gold reserves, which makes it hard (if not impossible) to determine how to properly price the commodity. Contrary to other commodities that gets consumed, gold does not get consumed therefore the more we extract the less valuable it becomes.

I would like to add a note here about real estate investing. Yes real estate is an investment. Real estate is worth what you can make from it, period. Rent it out and it brings income, live in it and it enables you to earn a living, grow food on it. The real estate debacle does not change the fact that it is an investment. The real estate bubble was caused by market distortions caused by idiots over the last ten years. But, the fact remains real estate is an investment and gold is not. Also, physical gold bullion locked in a vault, are not being invested; they are simply being stored. Therefore, while it is being stored they don’t earn interest or dividends, thus not an investment.

The reason of this posting is a warning to all of you that are considering "investing in gold". "Investing in gold" is a very dangerous game right now. Whenever the price of something rises as much, and as quickly, as gold has, we need to stop and consider the end game. As I drive through the streets of Florida, I notice the increase of guys standing on the streets waving “We Buy Gold” signs. They looked exactly like the guys I used to see all over Florida with the signs announcing open houses and selling real estate as a sure bet. The danger is how gold is being presented to the public as a sure bet investment. Due to the current conditions of the various financial markets locally and internationally, investors are looking where to place their liquidity to generate income. The problem is that there are a great amount of scammers wanting to take advantage of this opportunity to gain access to the available liquidity. Now please understand that I am not saying that you should not own gold, or that gold is a scam. What I am saying is that the people buying gold have no true way to value it, and therefore are speculating, not investing.

Finally, keep in mind that there are huge institutional players in the gold market right now. When they decide that the run is over, there won’t be time for you to run to your safe in the basement, pack up all your gold coins and bars, run to the local pawn shop and get rid of it. I do not know where the price of gold is going, but for me it doesn’t matter.