Gold Not a Perfect Way of Measuring Wealth, Just the Best Way

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Oil edged up towards $80 a barrel yesterday. And the latest numbers for producer prices showed more inflation than was expected.

Meanwhile, jobless claims were up. And the Dow rose 86 points…

What do investors see that we don’t? A mirage…the shimmering of hot money…money that comes from the feds. And they can’t believe it’s not real.

But that’s the problem. No one can tell the difference between real money and the counterfeit stuff. Nor can they tell the difference between real prosperity and the phony variety. And who can really know whether the feds are doing some good…or just up to their usual tricks?

Oh my…it’s Friday…and we’re too tired to dig very deeply into these issues. We’re going to keep it simple…even superficial…

Yesterday, gold rose $4. Is it too expensive…or too late… to buy in now?

What we’re looking at is a huge, systemic failure. Instead of ‘keeping it real,’ the financial system has been so phonied up that you can’t tell what’s what.

And then, when prices move…you have to figure out what’s really moving. Is the world spinning? Or just you?

We’ve been following the gold market for years. Gold has gone up about 300% over the last 10 years. But what does that mean? Does it mean gold has gone up? Or that the dollar has gone down?

We raise the question because we’re wondering how to keep score… Richard Russell suggests that you should keep score in ounces of gold, not in dollars. He’s right. Gold is not a perfect way of measuring wealth…it’s just the best way.

Over the long pull of history, gold is more reliable a measure of wealth than just about anything else. Whether you had 100 ounces of gold at the time of Caesar or 100 ounces at the time of Charlemagne…or 100 ounces during the Jimmy Carter years – you were well off.

Note that we said gold is a ‘measure of wealth’ not means to wealth. Gold is inert. Lifeless. Incorruptible. But inherently shiftless. It never gets out of bed in the morning. It has never earned a penny in its entire life.

Gold won’t make you rich. It toils not; neither does it spin. Since it doesn’t hustle, it won’t increase your wealth. That’s why, in the Bible, the slave who kept his master’s wealth safe in gold got beaten. Gold won’t earn a profit. It won’t pay you a salary or give you a company car. All it will do is help keep you from getting poor. We’ve never heard of a man who had 100 ounces of gold who was poor. On the other hand, we’ve read about millions of people with stacks of paper money who couldn’t afford a cup of coffee. In our wallet, for example, is a 10 Trillion Dollar bill from Zimbabwe. A dear reader gave it to us. You could have a stack of those a foot high. You still wouldn’t be able to buy a latte at Starbucks. On the other hand, imagine you had a stack of Krugerrands or maple leafs. Well, you still couldn’t buy a cup of coffee at Starbucks. Because the dumb clerk wouldn’t know what it was. And if he did take the gold coin in exchange for coffee, he’d probably rush over to the mall where some sharp dealer offered to take it off his hands in exchange for PAPER MONEY!

You see, the average person has no idea what real money is. One dollar bill looks the same as another to him. And gold? He’s probably never seen gold, unless it was wrapped around his finger.

Gold is real money. At least, it’s as real as money ever gets. Gold represents wealth. It can be exchanged for wealth. And since the above-ground supply of gold grows about as fast as the economy itself, gold tends to hold its value over centuries. Today, gold is worth about the same as it was worth 2000 years ago.

But you’ve heard us make that point before, haven’t you? Well, the point we’re making today is different. If gold holds its value, more or less, year after year…how can you expect to make any real profit by holding gold? Won’t it hold its value in the future too?

Yes, dear reader, it probably will. As inflation increases, you’ll watch your gold shoot up in price…along with other prices!

BUT…gold is subject to manias and bubbles…just like everything else. Though, it can be expected to hold its value in the long run, in the short run, it could become very over-valued. Why? Because the paper money system is doomed. It is doomed because we can’t tell the difference between a real dollar…and a phony one. And it is doomed because the people in charge of dollars find it more convenient to introduce new counterfeit dollars than to strictly control the quantity and quality of the US currency.

Little by little, average people will come to see gold as a way to protect themselves. Then, suddenly, they will begin talking about gold. Cab drivers will have opinions about which gold coins are the best one to own. Hairstylists will want to convert their savings into gold rings and bracelets. Investors will talk about how much they made by trading in and out of mining stocks.

Gold will soar. Gold’s bubble will have finally arrived. Then, it will be time to sell.

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
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79 Comments on "Gold Not a Perfect Way of Measuring Wealth, Just the Best Way"

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paul frost
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I purchased gold bullion in 2007.I only wish i could sell it for the same aud i purchased it for.You guys nearly always avoid this point.

Matto
Guest
Paul – purely hypothesising but if we get another flight to safety – re the USD you might get a short window to cash in at a profit fairly soon. On the article “it is doomed because we can’t tell the difference between a real dollar…and a phony one. And it is doomed because the people in charge of dollars find it more convenient to introduce new counterfeit dollars than to strictly control the quantity and quality of the US currency.” at some point the quest to build wealth, a nestegg, etc. will not be enough to motivate people. when… Read more »
Lachlan
Guest

“Little by little, average people will come to see gold as a way to protect themselves”
When gold goes up people always agree with me how good an investment it is. But not a single one understand it. Not a single one have bought any yet. Gold has quadrupled in price in 10 years and still only the cranks bother to own it.

Stillgotshoeson
Guest

I would rather have shares in gold miners than to actually hold the physical bullion, but that’s just me…

SV
Guest

And why would not cab drivers have an opinion on gold if many of them were economists, analysts and bankers in their previous life?

Christina
Guest

Dear stillgotshoeson, it’s better to have physical bullion that shares in gold mines becuase not if, but when the market crashes, what will happen to your shares? During the great depression in the 1930’s a very famous saying was born: “If you don’t hold it, you don’t own it” as many millions of people found out the hard way. If you do not hold it, then all you own is a promise

Christina
Guest

I meant to say than, not that

Ross
Guest
I am in the sceptic camp when it comes to gold. The claim essentially is that gold has tradeable currency potential beyond the control of government. So my mind is drawn to “control of government”, and their interests, and their forces, and the historical record. Reading Ron Manners book I was reminded not only of the bust side of mining in Australia, which should be prescient in our minds as our boom continues even as a consumer bust is acknowledged in major markets, but also of the power of govt. Gold mining was switched off in Australia for many years… Read more »
Dan
Guest

By buying gold, you are betting that if governments and their currencies fail, banks will nonetheless survive. It’s the banks that have the gold, who sell it and who manipulate its price. Yet governments already depend fully on banks for their existence, even before the fall of Napoleon. Otherwise, a metal whose only practical uses are electronics and jewellery is no better than any other substance. Believing in gold is believing that banks will still honour it when the time comes. Maybe this is a correct belief, or maybe not, but real wealth has to be tangible, useful and exchangeable.

Stillgotshoeson
Guest
@Christina When the market crashes, I will continue to hold my positions and ride it out. When gold does rally, the shares in those gold mining companies will default. My Gold Mininer positions are.. Citigold 400000 shares @8.5 cents Lihir Gold 10000 @$2.98 (down a bit at the moment) Gold One 100000 shares @28.5 cents Over the next 5 years I expect Citigold to hit $1.50 Lihir to hit around $7 Gold One to go around $3 $34000 + $29800 + $28500 = $92300 $92300/1100 (oz gold)= 83 Ounces Gold (approx) Gold Skyrockets to $6000 an Ounce $498000 ( I… Read more »
Stillgotshoeson
Guest

oops will rise by default… biker_pete will be all over that :)

Justin
Guest

Completely, totally & utterly wrong. Gold is tangible, is useful & is exchangeable. It is in fact more exchangeable than any other substance.

And if banks have all the gold, how are currencies going to fail? they are the (paper) currency generators. Truth is, most banks have mere promises to pay gold, including the biggest bank of all, the Central Bank.

I even suspect, by the massive increase in IMF generated SDR’s on the balance sheet of the RBA, that Australia’s pledge of gold to the IMF has gone down the toilet.

Justin
Guest
Hope you’re right about Citigold Stillgotshoeson, but they’ll have to pull their fingers out. More likely I think, they will get bought out by a larger (hopefully better) miner if the share price falls low enough. Don’t think their latest ‘capital raising’ (should that be fleecing?) is going very well. Might force them to shape up. And remember, even if the share price does hit $1.50, you are only selling shares for dollars. If gold is $6000 an ounce, you might be lucky to fill your petrol tank with the proceeds. And that’s assuming that the petrol station will still… Read more »
Biker Pete
Guest
Contrary to popular opinion, I hold no really strong position on gold at all. I related the parable of the Aussie Rules footballer who took his life when gold crashed, to my two sons nearly two decades ago; simply to demonstrate that it then rose to almost $1000 / oz… and that he should have ‘held his position’. Sometimes I conclude, perhaps wrongly, that most here are pessimists. That’s a flawed perception if you consider that, in fact, many here are optimistic about gold rising. You have to acknowledge that optimism when you read genuinely-made predictions of gold at $2400… Read more »
Stillgotshoeson
Guest
@Justin.. I am bullish on gold but not $6000 an ounce bullish. $2000 to $3000 is probable with a $2400 to $2600 mid range target likely. I would expect the current capital raising to not be doing so good… why would you buy at 12 cents when you can buy at 9 cents… If they are bought out by a bigger miner I should still make money, you never lose selling for a profit ;) I would then direct those funds somewhere else, depending on the market at the time.. If the world does turn to hell in a basket… Read more »
Lachlan
Guest
My own thinking on gold is evolving over time too. Biker unless you were mega-leveraged you would still be wealthy in tangibles (property) regardless of a crash which is why too I have increasing like for the hard stuffs (plural) and dislike for paper. I bought more PMs this week gone as I cant afford a farm right now even a tiddler. If I could I would regardless of looming crashes but not leveraged of course. And there is a risk these types property might go through the roof if one waits. They have in other high inflation states. I… Read more »
Stillgotshoeson
Guest

@Justin

“And remember, even if the share price does hit $1.50, you are only selling shares for dollars. If gold is $6000 an ounce, you might be lucky to fill your petrol tank with the proceeds. And that’s assuming that the petrol station will still have petrol, when gold is $6000 an ounce. ”

So I am still better off with the miners if I am right.. at least I can get a tank and half of petrol instead of selling the gold and only getting a tankful… :)

Biker Pete
Guest
Lachlan: “Biker unless you were mega-leveraged you would still be wealthy in tangibles (property) regardless of a crash…” It’s hard to know what ‘mega-leveraged’ means today, Lachlan. If you mean ‘Would your super pay off all your property debts?’ the answer is ‘No’. If the question is “Would your _combined_ super pay off all your property debts?” the answer is a healthy ‘Yes’. That’s why I believe in a three-asset mix: Property, Super, Cash. (Our eldest (28) believes in four: Shares, Cash, Property, Super… in that order. His younger brother (24) invests in three: Property, Cash, Shares, in that order.)… Read more »
Stillgotshoeson
Guest

I am with your eldest… same 4, different order.. but I am a little older so my priorities are a different.

Greg Atkinson
Guest

I been away for a while but I see DR is still pushing gold so I guess somethings never change. Every day more and more gold is mined and moved into vaults so that it can, well, sit in a vault :)

Want a good measure of wealth?…try oil. Oil has made more fortunes than gold.

Dan
Guest

Exchangeability is all in the mind, you know. If people believe in something, you can exchange it. I know quite a few people who have a gold stash, some quite sizeable, but they wouldn’t dream of using it unless they were desparate, like for airfares, border-bribes and setting up in a new country.

Justin
Guest

No Dan, gold is NOT in the mind. The dollar on the other hand is the obligation of the issuer & no matter how much the issuer pretends that it is exchangeable, it remains an obligation so IS all in the mind.

Justin
Guest

so long as the issuer is obligated to pay nothing.

Justin
Guest

or should that be obliged?

Dan
Guest
Gold, as money, is a token of value, just as is paper, or an electronic record of credit. What you can buy with gold depends on what people think of it (even though its quantity in the world is ultimately limited). But the necessities in life remain so – food, shelter, clothing, and whatever else people consider to be necessary – and any necessity that has a fixed or limited supply, is the greatest because its value is _guaranteed_. I am really not for or against ownership of gold, and I accept that if/as/when fiat currency fails, something must and… Read more »
Justin
Guest

You are confusing payment with an obligation to pay. Spend some time investigating the nature of money.

There is no rival of gold, if there was it would be gold.

Biker Pete
Guest

Justin: “You are confusing payment with an obligation to pay. Spend some time investigating the nature of money. There is no rival of gold, if there was it would be gold.”

Spend some time investigating the nature of precious metals. There is a rival to gold. It is platinum.

Dan
Guest

Ultimately it’s up to the people with the most planes, tanks, guns, nukes and subs to determine what people use as currency. Behind whoever it is, you will find that the ultimate power lies in the central banks. It’s only because of this fact that I believe that gold has a (by no means guaranteed) future as an alternative to today’s fiat currencies. Yet I can’t see how those same central banks want to give up on a system that has essentially given them sovereignty over the whole earth.

Greg Atkinson
Guest

Yes Biker Pete we don’t hear much about platinum. There are also a few other precious metals that are higher up the pecking order than gold because industry needs them as opposed to using them to fill up vaults. Personally I am a fan of uranium as even the U.S are back in the building nuclear power plants game now it seems.

Biker Pete
Guest

Greg, I’ve been watching the price of the $5 Koala fluctuate on ebay with some interest. Currently the range is 99c to $149.00…!

Uranium: Worth noting that the Entergy plant is being decommissioned even as Obama signals it’s all go, Greg. And mining approvals for thorium/monazite are becoming scarce. There was a French proposal to mine about 80 km south of Perth, but I think that was KO-ed. The French no longer approve mining it in France. No wonder the Chinese are prepared to buy it anywhere they can!

Lachlan
Guest

Cant a revision of the gold price upward (a lot) solve problems for CBs at some point (post crash)? Or not?
OK we cant tell the future, maybe we’ll kill each other over trade differences but some things to do with the future are either possible or not, so I wonder about this.
I agree with Dan about the importance of food,shelter etc for the individual level but gold important on a CB, government level, which eventually ensures its global importance as money to re-emerge…eventually (maybe not long now), so to save for anything I have to choose it.

Biker Pete
Guest
Lachlan: “…the importance of food…” Ahhh, food. That’s why a nice little block with lots of water is the ideal, mate! Some top-quality imported snares, a few chooks, a small multi-grafted orchard and a vege patch and Robert’s yer dad’s sibling. Wouldn’t be dead fer pre-decimal currency. A few mates producing F & V themselves, to trade with. And if there’s a LETS operating near you, so much the better. “…maybe we’ll kill each other over trade differences… ” More likely to be water and/or fuel… but it could be food… . That’s why populating our Ord region could be… Read more »
Ned S
Guest

Hmmm … For what might I exchange my gold and virgin daugthers in times of great trouble and wont? ;)

Biker Pete
Guest

Let the Bidding Wars begin…!~ :)

Christina
Guest
Dear stillgotshoes on, I understand what you are saying, and I totally respect your opinion. However I think that you are making a very dangerous financial assumption. You are making he assumption that “when the marklets go back up again you will do this and this and this” Who says the markets are going to go back up again in our lifetimes? Many a failed empire in history are still waiting for their market to go up again. The Romans, Egyptions, etc etc waited and waited and waited for their empires to “bounce back again” but it never happened. And… Read more »
Ned S
Guest

Oz is a flea on the tail of a dieing dog. The question is, will the tail take on a life of its own?

Ned S
Guest

“dying” I do believe?

Ned S
Guest
Dan: “I am really not for or against ownership of gold, and I accept that if/as/when fiat currency fails, something must and will take its place” – A gold/commodities based currency won’t cut it. IMO. Because the one thing we can be sure of is that the moment it doesn’t suit the owners of said gold/commodities based currency to retain the tie, they’ll ditch it. The only thing option we have is what we’ve come down to – Trust and faith – In a government and its people to behave in a fiscally responsibly way …Ouch! … Pick ya Pig!!!… Read more »
Lachlan
Guest
I only ever bought gold to trade back into land after a theoretical reset in the ratio gold prices:land prices following or during a fiat collapse. I would value the land/water and the food you grow there much much higher in such circumstances as a global depression. For money substitutes in a depression I have cheap silver coins and other. I am a seed collector (native grass/tree seeds go into gov’t works and mining reveg) so I naturally have tinkered with production and storing of vegetable seeds. I have no idea how that would turn out in the real scenario.… Read more »
Lachlan
Guest

Then we shall find a healthy young puppy Ned.

Ned S
Guest

Have a vague recollection of reading the only stuff Marc Faber reckoned represented value at the moment Lachlan is agricultural land in Russia and Uruguay and Paraguay? No idea if he’s ever been to Uruguay and Paraguay … But suspect he’s never been to Russia? :)

Ned S
Guest
In fairness to Faber, while he could well be right about Russkie wheat ‘n stuff (?), the land blocks they do their serious production on are huge – And roll to the horizon – Literally. The old collectives structure still exists in some shape or form I imagine? I asked about any opportunity re getting a bit of same once for a little Aussie boy and just got told No way – Rightly or wrongly. But it’s not a country one would rush to invest in regardless … The whole system is simply too corrupt. IMO. (And that’s saying a… Read more »
Stillgotshsoeson
Guest
@Christina It is not ALL in Gold Shares only 15% of my portfolio is Gold Shares… I have Financial, Real Estate, Iron Ore, Energy (Oil and Gas) and health, I am also carrying cash.. 7 years ago I had $12000 to my name and $50000 debt I now have no debt, a $700000 portfolio, Have been to America, England and Japan and purchased a Landcruiser.. I think I have played the game fairly well so far.. Biker_Pete may view this as smugness and arrogant but I am damn proud of my achievements so far.. I have made good calls so… Read more »
Stillgotshsoeson
Guest

as for Citigold… Past announcements indicated a revised forecast for 2010 production down from 85000 ounces to 50000 ounces, April Quarterly Report should give an indication if they are on target to achieve that revised forecast.. 1st Quarter production should be no less than 10000 ounces and hopefully up around 12000 to 14000 ounces to achieve or improve on forecast if they do achieve forcast share prices should improve a little, if they fail to achieve then things could turn sour…

Biker Pete
Guest
Christina: “…the big crash comes, you can’t eat a paper share certificate.” And gold is so much more palatable… . And c-r-u-n-c-h-y! Ooops, that’s a molar… Immediately after food and water, in Maslow’s hierarchy comes ………. ? a. Gold b. Platinum c. Shelter d. Mrs Maslow Ned: “Oz is a flea on the tail of a dieing / dying / dyeing dog.” Remember when your physics teacher explained that we’re all very likely a complex speck on the leg of a flea on the tail of a dog in space? No? You failed Year 12 Physics?! The Ultimate Trouser Snake… Read more »
Lachlan
Guest

The big one is coming today!!! But its made of water. There is a “tsunami alert”from about Rocky to Tasmania. Fair dinkum.

Dan
Guest

There are strong predictions coming out this weekend of the imminent collapse of the Pound and USD, so despite my negativity on gold (which is more philosophical than practical), it would appear that its price is set to ‘decouple’ (ie: soar like a bird with a rocket up its posterior). Still, having no debts, a reliable backup for food and shelter, personal safety etc, come first.

Justin
Guest

Excellent idea BIKER Pete, but should put your money where your mouth is. Go buy platinum, store it at your houses.

Dan
Guest

Justin, if you’ve been reading or hearing about the discussions among central bankers you’d be aware that of the few that are contemplating a return to a metal standard consider all the precious metals as viable alternatives to gold. If Russia went for palladium, for example, while others stayed with fiat (eg: trading on the back of oil and militarism) would you wish you’d bought palladium?

Biker Pete
Guest

Gee, Justin, Multiple Choice is supposed to be easy.

The correct answer is: c. Shelter

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