by Shelby Moore III
CEO 3Dize, Inc. (coolpage.com)
August 18, 2005
Long-term, gold appreciates more than any other asset you can own.
Since 1959, the compounded supply side inflation basis of gold is 1.73% compared to 7.8% for US dollar. Thus, the historical real rate of return for gold relative to US dollar is 6.07%.
In comparison, the real rate of return (valuation) of stock market in US dollars is 7%. The real rate of return in US dollars of checking/savings accounts and real estate held long-term is negative! Negative return means you lose wealth!
Although an expert investor, e.g. Warren Buffet (search for "gold" for his comments), may be able to pick stocks (companies) which outperform the stock market composite, the stock market composite will only do 1% better than gold over the long-term. However, it is key to understand that people do not bank in stocks, they invest in them. And the emotions of investing are such that non-experts do not hold stocks for long-term, and buy too high and sell too low. This is because the temperment of the average person is not to hold a non-consumable good if it is not appreciating in short-term, because emotionally the average person wants their money to always do something they can feel good about.
Thus in reality, the real rate of return for the average person in the stock market will be much lower and possibly negative! Banking in gold with a long-term real rate of return of 6% is superior for the non-expert investor.
Note the comparison of rates of return above is in US dollars, based on the intrinsic value (supply) of US dollar. If we compare on the CPI purchasing power of the US dollar, then over past 100 years, the stock market has averaged 9.9% compounded rate of return against an average compounded CPI of 3.3%, i.e. 6.6% real rate of return. There is no way to compare gold this way over 100 years, because the US dollar was tied to a gold standard (price of gold frozen in dollars) until 1971. The CPI does not represent the true value of wealth, because it is basket of things that people do not all buy in same proportions, and it does not account for future price shocks due to an artificially strong dollar relative to the currencies in which the goods and services in the CPI are created (e.g. China). For example, tuition for college increases at up to double the rate of CPI! It is also likely that stocks are artificially inflated right now, due to the drastic increase in money supply (M3) since the end of gold standard in 1971, thus any comparison based on CPI is potentially skewed by an imminent crash in equities, US dollar, or housing bubble [1]. The most absolute comparison for measuring wealth is using supply inflation of the asset (gold and US Dollar), as I did above.
Why bank in, instead of invest in, gold?
All investments go up and down in cycles, called crashes and booms. For example, in real purchasing power terms (interest rate minus CPI) savings accounts have lost -2.1% of your money in 2002, an roughly estimated -9% from 1991 - 2002, and roughly -6% from 2000 - 2003!
Although gold is not immune from crash and boom cycles, neither are savings accounts, cash, or any other means of storing your money. And over the long-term, gold appreciates 6% in US dollars (assuming continued historical 1.73% growth in supply of gold and 7.8% growth in supply (M3) of US dollar), which is much higher than savings accounts.
Now there is an easy way to bank in gold, meaning using gold as a place to store your money and spend it at will, just as you do with a checking account. Thus you do not need to think about whether the price of gold in US dollars is going up or down over the short-term, because you are constantly spending and depositing into your gold banking account, which in effect causes you to do "dollar cost averaging".
The concept of "dollar cost averaging" is that you buy or sell a little bit every so often, thus the short-term fluctuations (losses and gains due to crashes and booms) in the price of your investment average out. However, this is nearly impossible for an average person to do with investments, because of the emotional aspect described previously. However, with banking in gold, the "dollar cost averaging" happens automatically as a function of banking (spending and depositing)!
Again my key point (epipheny) is that while gold is arguably not the highest possible return investment (merely tracks supply side inflation and generates no productive multiplier), it is a much better way to bank over long-term, because banking is inherently "dollar cost averaging", and because the return on US dollar savings does not compete with return on gold over long-term, due to the much larger supply side inflation of M3 versus gold.
But price of gold did not increase since 1979!
It is true that gold has lost roughly -11% of it's CPI purchasing power from 1991 - 2005, it is roughly the same -11% for savings accounts. However, unlike savings accounts, gold must over the long-term return 6% compounded annual supply based rate of return. So since 1979, gold is currently short-term devalued by 454% (1.06 ^ 26). In brief, gold price in US dollars is way behind it's relative inflation and price must go up drastically!
Since 2001, gold price appears to have started an expected 10 year boom cycle. A model of gold price confirms this and is well correlated to past history. By most reasonable analysis, gold price must continue going up over the medium-term, although there will always be short-term fluctuations durings it's boom cycle. Current gold to oil ratio is statistically a sigma 2, which means it is an extremely rare event (less than 1% chance) thus is extremely unsustainable and must be corrected to historic norms.
When the stock market busts, then gold booms:
Benefits of banking in gold, versus savings/checking account?
As previously discussed above:
As will be discussed below:
Discourage the overspending and growth of governments?
History of goverments since the Greeks and Romans, and still true today, is that governments continually increase their influence over the activities of the country (or empire) they govern, until the their share of economic activity becomes so large that the country or empire collapses economically.
For example, USA federal goverment share of GDP (economic activity) has increased from 3% to 20% from 1930 to 2004. This means the federal government now accounts for 20% of all activity in USA, and that does not include the state governments! Just as what happened to Rome, it is unsustaineable for the government to be the economy. It is precisely how empires or countries fracture and crumble throughout history.
As governments bloat, they tend to become disconnected from the needs of the citizens and veer towards "stealth plutocracy", meaning government for and by the richest few, with only necessary appeasement and manipulation of the citizens. One of the clearest indicators today are governments support of massive illegal immigration and porous border security, in spite of what the citizens want and have proven can be easily done.
A significant net effect of an expanding government is the continual increase in total volume of economic activity, while facilitating the richest few to siphon off a percentage of that activity into real assets (e.g. gold), that will be retained after any collapse that affects the citizens, who are left holding worthless paper money, e.g. as happened in Germany prior to the 2nd world war. All (unfortunately) Jews were persecuted, because some few of Jews were the banking cartel in Germany before the collapse. And some Jews escaped Germany with their hordes of gold, while common folk held worthless paper by the wheelbarrow. This continual increase is done through the Central Banks, and the cartels of large banks, through the printing of paper money. As long as they print more money, an escalating illusion of economic growth results. But it is one giant bubble and it eventually crashes, as it did in the worldwide Great Depression of 1929.
When ever you choose to transact and save in gold, then you increase the value of gold, relative to the paper currencies (fiat). The law of supply and demand dictates that if only a small percent of the citizens did this, then the illusion of the Central Banks would come crashing down much sooner than it will otherwise, because as they print more money, then gold would just become more valueable in a snowballing effect that drives the fiat currencies down to worthless value.
Warning: this web page contains opinions based on empirical evidence, which should not be construed as investment or banking advice. 3Dize, Inc. and Shelby Moore III disclaim any responsibility for how readers use these opinions. Investing and banking decisions are the responsibility of the reader.
Last Updated: August 23, 2005