Very few, if any, investment sectors engender as much controversy and passion as gold. Historically considered both a safe-haven asset and a currency, gold’s status as the premiere symbol of wealth and power is unlikely to go away anytime soon. But because of this standing, there are several misconceptions and otherwise unhelpful analyses towards gold that can confuse investors, particularly those that are new to the bullion game.
One of the biggest sources of confusion when comparing gold across a wide time basis is context. While historical research of price movements and patterns is the bread-and-butter of technical analysis, gold is especially difficult to analyze over the long-term as compared to standard investments like blue-chip stocks.
Perhaps the biggest challenge is to establish an apples-to-apples framework with gold. It was only recently in 1971 that the direct convertibility between gold and the U.S. dollar ended. Prior to that fateful year, the dollar was pegged to gold at a fixed exchange rate. Thus, an analysis of gold’s price volatility to the greenback would yield a virtually straight line.
The other problem is inflation. While all assets of any monetary value are affected by the pernicious effects of inflation, gold is one of the most vulnerable assets. Because it was used officially as a lever to maintain monetary integrity of global currencies — and is still used unofficially today as a barometer of economic health — there is an inherent cultural component with gold that is difficult, if not impossible, to escape.
This cultural connection with gold directly links it with the stability of the dollar — higher gold prices logically means that the dollar supply is inflated (more money chasing fewer goods) while lower gold prices indicate a deflation of supply (less money chasing more goods). Whether this is actually true or not is irrelevant — if enough people perceive it to be that way, so it is.
Another pressing issue with gold is that its direct supply demand fundamentals apparently do not lever as much impact as one might normally expect. In years past, for example, there have been outcries among the gold and silver investment communities that bullion prices could not stay depressed indefinitely due to the fact that several mining companies would be forced to mine the metals below cost. Those accusations have no doubt increased in fervor given the enormous volatility experienced in the sector.
The pro-gold and silver crowd do have a point. Back in 1852 during the height of the Gold Rush, 81 million ounces of gold was produced from California mines. At the time, this was nearly half the rate of global production. Yet between 1839 until 1891, the London market price for gold remained fixed at £4.24 despite the influx of new production.
It is not any stretch of the imagination to say that there will be further misinformation distributed regarding gold prices; just keep in mind that “right” conclusions can stem from wrong contexts.