Since the Great Recession began in 2008, there have been unlimited doomsday commentaries about the rise in Federal debt and the coming collapse of the U.S. dollar:
The U.S. budget deficit grew another $53 billion.
Debt as a percentage of GDP is growing.
The Chinese prefer gold to U.S. dollars.
The commentaries always end with a stark “warning” to buy gold—the “safe” alternative to paper money. The gold peddlers pounce on every not-so-good economic report or stock market dip.
They try to convince you that gold has been a form of money for over 5,000 years. They contend that currencies come and go, but gold always has been, and always will be, valued as currency. In their words, gold is forever.
These peddlers give a partial history of gold and provide “evidence” that’s out of context.
GOLD AS MONEY
Over the last 10,000 years of human history, the material form of money has varied across continents, regions, cultures and time. Cattle, cowry and clam shells, metals, leather, grains and other commodities, paper and today’s electronic currency have all served to represent money.
Gold has always been precious to humans—it makes beautiful bling and jewelry. But throughout the long history of money, gold has been used as currency for only a few brief periods.
In 1816, England made gold its official standard of exchange. It was the first time that paper money was tied directly to gold. The U.S. made gold its official standard when they enacted the Gold Standard Act in 1900.
The purpose of the gold standard was to produce a currency of stable value. Note, however, that gold as the stable currency has never prevented recessions, depressions, inflation or stagflation. In fact, the Great Depression marked the beginning of the end of the gold standard globally.
In 1971, the U.S. got off the gold standard and the dollar became fiat money, where paper currency is not linked to a commodity. Fiat money has no value other than that given to it as money. The U.S. dollar is backed by the full faith and credit of the U.S. and is worth what it’s worth because the Federal government says so.
In contrast, gold is backed by nothing. No nation on earth backs gold. Therefore, it is actually less safe than the dollar. Plus, gold is expensive to own—you have to store, ship and insure it. What a deal!
GOLD COMPARED TO STOCKS AND BONDS
The chart below shows the growth of stocks and gold since the U.S. got off the gold standard in the early 1970s. Stocks win hands down.
A 2011 analysis by Joshua Kennon examined Stocks vs Bonds vs Gold Returns for the Past 200 Years. The table below summarizes his findings of a $10,000 investment in either stocks, bonds or gold from 1815-2011 (196 years).
For nearly 200 years, stock returns have crushed bond returns and bonds have crushed gold returns.
The primary reason: Productive assets create wealth. Stocks are the most productive asset because they are the only asset class in which you get to invest in human ingenuity, creativity and drive to create wealth.
Bonds are also productive, but are far less risky than stocks—at least over the short-term.
Gold…well it has returned nearly nothing over the last two centuries because it is not a productive asset. It just sits there—a lifeless store of value doing nothing.
MAKING THE CASE FOR GOLD
Like other peddlers who try to part you from your money, gold peddlers torture the data and selectively choose time periods that support their narrative. Right now, they are showing charts and analysis since 2000 that suggest a relationship in the rise of total U.S. debt and the price of gold.
But, when a critical mind expands the period to 20 to 30 years or more, you can see that there is no relationship between total U.S. debt and gold prices. This chart is from 1971-2000.
And this one is since 2010. (It's through October 1, 2015).
Do you see a relationship?
When I slice and dice the data, the only time that hints at a relationship is 2000-2010.
Still, I think gold serves a wonderful purpose: As a showpiece on a finger or wrist, in an ear or around a neck. Bling, bling.