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Three Common Misconceptions About Gold

Gold is an especially sensitive financial issue, with many conflicting opinions as to the nature of the investment and whether to be bullish or bearish. In this article, we delve into the most common misconceptions in order to find that gold is in fact an asset to be bullish about, as it is today’s means of wealth protection.

Published: 28-02-2013 00:00

Three Common Misconceptions About Gold

Misconception #1: Gold is not useful. Instead of stacking up on gold, people should buy food and energy, especially in an ‘end of days’ scenario.

It is precisely because gold is not ‘useful’ in the sense of being eaten or consumed, that it can better serve as medium of exchange without any wild fluctuations as demand for it shifts from being an investment to being for industry (this is in fact the case with silver, to a significant degree).

Food and other essentials will of course never be completely ignored. They are irreplaceable for their functions of bodily nourishment and the like. But barring a scenario where exchanges between people are completely stopped, it is best to have a good that is most exchangeable among the greatest number of people. This is for what precious metals serve best.

Apart from the amount needed for immediate or near-future consumption, savings ought to be placed in a way that is durable, that is divisible in various amounts, and in something rare enough to be worth investing in.

Misconception #2: There is too little gold to be exchanged. A gold standard would result in a ‘deflation’ in prices and thus a depression.

The claim that there is not enough gold for trading has been used as an excuse for central banks’ money printing operations, wherein a country’s money supply is increased beyond any backing in physical gold. The mistaken assumption is that there is any optimum amount to be used for trading. But no matter the amount of a certain commodity used as medium of exchange, prices will reflect this supply, and not to anyone’s prejudice.

The less supply there is for a commodity, the lower will be the nominal prices. The higher the supply, the higher the nominal prices. The only real concern of a person transacting in the market is if his income or savings can buy the same quantity of goods, or more, in the future. This is where precious metals come in handy, since they tend to directly reflect the price increases that signify devaluation of a currency or currencies.

Misconception #3: The rigidity of the gold standard caused depressions, including the Great Depression of the 1930s.

Actually, even the claim that countries were on the gold standard during the time of the Great Depression in the West is questionable, considering that the monetary operations of the US and UK resulted in an increase in money supply beyond whatever gold reserves they had. Such inflation in fact preceded most recessions or depressions in the 19th century up till the Great Depression, which lasted till the mid-1940s.

So if it wasn’t gold’s ‘rigidity’ in not being increasable in supply that caused depressions, what did? It was in fact the activities of banking officials, who expanded credit and thereby artificially stimulated markets and made for more expensive goods without actually increasing productivity. Later, when interest rates had to be raised so as to avoid hyperinflation and drastic debasement, this caused defaults on loans on a large scale. And employers, facing low sales, had to lay off workers and lowered prices.

If countries had maintained their ties to gold, there would be no depressions to speak of, whether in the 1930s or today.