By Jamie Dlugosch, Editor, InvestorPlace
There is no place for gold on the global financial stage.
I will be very blunt…
I despise gold and everything it stands for.
It's an abhorrent example of materialism and serves no real purpose. Lust for gold is over-the-top excess, and despite the protestations of the goldbugs, there is no real basis for the metal serving the currency needs of the world.
The fear mongers will have you believe that the world is collapsing and that inflation has run amok. As a result, the only real currency out there is gold. Given that gold is in finite supply, it should be bought and hoarded…or so the theory goes. Gold is the only thing that you can count on.
What hogwash.
There is no place for gold on the global financial stage.
Reason #1: There Is No Inflation
Whether it's collapsing home prices, discounts on automobiles or reductions in stock prices, asset values across the board are declining, not increasing.
The gold bulls state that enemy number-one of the dollar-denominated currency is inflation. I agree wholeheartedly, and so does the Federal Reserve.
There are many backseat drivers that are claiming that the Federal Reserve does not truly fight inflation. That is a crock. In reality, inflation during the last bull market occurred due to massive amounts of private capital leverage. Indeed, the Federal Reserve did keep interest rates too low for too long in the early part of this decade, but do not forget that the stated goal of the central bank is to fight inflation.
Today, the numbers do not support an inflationary environment and fear over current spending and stimulus of the government creating inflation is misplaced.
I say be not afraid!
Reason #2: Gold Prices Are Easily Manipulated
One thing I am very afraid of with gold is manipulation.
Unlike paper currency that is impossible to manipulate in any way, gold can be accumulated by a group of connected buyers for the sole purpose of eliminating supply from the market. A successful cornering of the market can result in volatile swings in price. Unsuspecting buyers acquire bullion at higher prices only to see a flood of supply hit the market resulting in damaging price collapse.
This is exactly what transpired in the 1980s in the silver market. The Hunt brothers did just that with the use of leverage at a time of minimal margin requirements on commodities exchanges.
Although the likelihood is low, investors should be cautious with any commodity that can be manipulated in this way. I prefer to avoid it altogether.
Reason #3: Gold Is in Limited Supply
Related to manipulation, the simple fact is that there is a limited supply of gold.
Those who want to return to the gold standard fail to appreciate that at some point a lack of supply could have disastrous consequences in a gold-based system.
Wars are fought over commodities in short supply. In addition to fighting inflation, the Federal Reserve is also charged with promoting a stable currency. With gold, prices can be far from stable.
Though the dollar is not perfect, the system is much more preferable than to hinge our bets on gold. Look at gold mining towns that went boom and bust when supply eroded. The same can happen on a global scale.
Gold is not the panacea that the proponents make it out to be.
Reason #4: Gold Was Dead for 20 Years
For more than 20 years, the price of gold did nothing. If you invested in gold, you wasted your time. That all changed with fears of inflation and hedge fund speculation several years ago.
Today, the church of gold is full of believers. What changed?
Nothing really except we have experienced an unprecedented upheaval in the global economy and financial markets. No wonder there has been a flight to gold.
The trouble is that the gold rush is not likely to last. In fact, there has been tremendous resistance for gold at $1,000 per ounce. Do you really want to buy at the top? I don't think so.
Once the economy stabilizes and we get a return to normalcy with respect to the business cycle (in other words an ending of the boom/bust period), gold will go back into hibernation. Demand for jewelry cannot absorb the current supply.
As such, a strong dollar is likely to absolutely destroy the price of gold. To me that is the far more likely outcome today.
Reason #5: The Dollar Is the Global Currency
You may have heard the recent calls from China for a global reserve currency that is not the dollar.
Good luck with that one. The dollar is the global reserve currency. Do not underestimate the strength of this country as compared to the rest of the world. Predictions of our demise are premature.
Recently, Treasury Secretary Timothy Geithner emphatically declared his belief in a strong dollar policy. Buying gold is like spitting into the wind then. One thing a trader learns at the start of his training is to never fight the Federal Reserve or the Treasury department.
If you can remove the clouds of crisis, the clear skies ahead provide comfort to me that gold has seen its best days. Those worried about massive deficits need to recall that our country was founded with debt, debt that was ultimately paid back.
We make good on our debts, which is why even during this crisis, buyers of Treasury securities remains strong. Note that such buyers could just as easily buy gold. They are not.
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