Gold is Up, or Down - Who Cares?

I have been wanting to say something about the gold market. Many people I am sure are confused and concerned about the drop in the dollar price of gold that has occurred over the last year or so. To understand what is happening you need the right perspective. The gold market (and to some extent the silver market) is different from any other market, commodity or other wise. The demand for gold comes from many different desires and interests, as I tried to enumerate in this blog a couple years ago. Each different type of demand for the metal will have different reactions to price changes and the level of prices in comparison to the rest of the economy.

I said earlier that the raise of the dollar cost of gold went up as high as it did at least partially as a result of the interest of the hedge funds. Necessarily, their interest was short-term. That is their business: short-term speculation. The amount of money the hedge funds put into gold was large enough to have a significant impact on the price. I wonder if the hedge fund managers realized how much impact they would have. In fact, the international gold market is fairly thin. In any event, there had to come a time when the hedge funds would leave the gold market. We can readily see when that happened, can’t we.

The dramatic drop in the price of gold has been taken by many as an indication that people aren’t as concerned about the future as they were, that maybe the situation is better now than before, that gold is no longer seen as much of a hedge. I think all of those ideas are silly.

You also hear some people who are ostensibly interested in gold to preserve the value of their assets express unhappiness with the drop in the dollar price of gold.

If you are concerned about the price in the short-term (and I mean more than just wanting to get as much gold as you can when you are ready to buy), then you really aren’t looking for asset preservation, you are a speculator (a perfectly fine thing to be).

If you are sincerely interested in asset preservation, which is a long-term attitude, then don’t worry about the current price or what it will be and get on with your daily activities. Do not be confuse the impact of monetary expansion with raising prices or with how many dollars it takes to buy a troy oz. of gold. The threat to your assets is broader and more insidious than that and is not reflected in the short-term variation of the dollar-gold exchange rate.