Gold
3
We have all these gold bugs running around trying to scare people into buying physical gold. Their sales pitch is based on fear, fear of hyperinflation, war and other unforeseen events.
I'm skeptical of gold because it has very little market utility, thus it won't be very useful in a situation where we might have a barter type of economy. Furthermore, it is not a very liquid asset. And of course, the people who are hyping up the gold market many times are financially tied to rising gold prices, thus they have an interest in pumping up its price.
The idea that they promote is that the price of gold will continue to rise as the dollar's reign as the world's reserve currency comes to an end. Most of these predictions are off base due to various factors, among them the depth of the US Treasuries market and the lack of an alternate currency with such resources to fill this demand. The dollar will eventually cease to be the world's reserve currency, but not anytime soon. Anyone who tells you otherwise is fearmongering in an attempt to game you out of your money.
The real game is what the gold dealers do to promote their product and pump up the value of their favorite commodity. These guys make their living by selling gold, not by buying it and holding it as they recommend. This activity is contrary to what one would expect if gold dealers really felt that gold would rise in price. By doing this, they're not only taking advantage of its price volatility, they are also maintaining a very liquid position in gold because they realize that one of these price corrections may very well represent the end of gold's bull market (ongoing since 2002). As such, they trade gold on a short-term basis, while advising the consumer to take a buy and hold strategy. That acts to essentially transfer their risk onto the sucker who's holding the gold long term.
The gold bugs also make the specious argument that gold offers protection against inflation (it's actually protection against deflation in most instances) and the collapse of the dollar, thus you should transfer a good deal of your investment capital and savings to gold. While it is partially true, the connection between the price of gold and a declining dollar is not as clear as some would have you believe. There is a clearer connection between rising oil prices and higher gold prices. This might make it a good buy (especially given the recent turmoil in the Middle East, which is driving up the futures market), but only if you intend to hold it for a short period.
The people they're targeting have lost all faith in America's capital markets and don't want to lose more than they already have. And there are many people on this boat right now. Many people in this position have moved the bulk of their assets into gold and silver, largely as a protective measure.
Needless to say, this is a very dangerous move because gold is not bound to stay at above $1,000 forever. When this bull market ends, it will do so without much warning. You might think that you will be able to unload it before the price goes down, but many will be left stuck holding the bag when it happens.
I don't deny that the US economy is not in good shape, but the overall picture isn't as bad as the gold people and the doom-and-gloomers would have you believe. Understand this about the value of gold: the higher an asset price rises, the higher the risk becomes. This is especially the case with assets that have very little intrinsic value, such as is the case with gold.
Gold's upward price swing has been driven primarily by hype; it has nothing to do with real investment dynamics. It is a classic speculative bubble. This campaign to pump up the value of gold represents a pyramid scheme where gold dealers profit, along with those who bought earlier in the bull market. People buying gold now stand to lose money down the road because they have no exit strategy. If you've already invested in gold, the most important question you should be asking yourself is not how much the price of gold will rise, but rather when to exit the investment, because when its price goes down, it will likely stay low for several years.
What the gold dealers are trying to do is create a self-fulfilling prophesy. Because there's no way to value gold using traditional valuation methods, the price is determined by perceived value, which itself is based on the expectation of price appreciation. What they do is say that gold will reach very high levels, perhaps $5000 an ounce while preaching hyperinflation myths. The price might reach $5000, but only if you the consumer makes it happen. That's not investing. That's speculation, because the price levels are simply not sustainable or based on valid economic assumptions.
The gold sellers are really involved in a pump and dump scam, similar to what we see in Wall Street everyday. You're probably familiar with how this works; it's been around for a very long time. It was very common, especially during the dot-com era. A wave of propaganda is pumped out to unsophisticated investors who believe the hype and exaggerations by stock promoters. While the worthless stocks sometimes rise substantially in price, the party usually ends without warning, leaving people left holding a bad of empty goods. One characteristic common among all these scams is that the promoters never talk about the downside risk.
In short, buyer beware...Understand fully what you're buying into and if you do invest in it, have a clear exit strategy.