The “Gold bugs’” main argument for why people should invest in gold rather than an S&P fund is that the value of the USD is dropping, so much that they claim it just may become “infinitely worthless”. Without any knowledge of macroeconomics such a claim makes some sense. If the USD is losing its value while gold seems to be retaining its value why not invest in gold? This article does a good job of going on to explain why despite appearances it still is best to not invest in gold. Yes gold has won in value in the last 5 to ten years but in the past 30 years and more, an actual ‘long-term’ investment horizon; it most definitely has not been the better investment choice. The article mostly focuses on proving why investing in gold is directly not a wise decision but it does not touch on why the dropping value of the USD might be an intentional occurrence. Like Europe, America has also been in a sustained financial crisis, and in order to rejuvenate the economy one method is to reduce the value of the USD so as to encourage exportation and trade with other countries. By lowering the value of the USD, American products are that much cheaper on the world market and therefore that much more competitive. Also this article uses the Gold Bugs’ argument as a solid example of how easily truth can be altered in economic models. The charts and facts thrown around by those that insist in investing in gold are half baked and don’t account for what is fully occurring in the economy.
I find it puzzling that so many economists and researchers have published findings proving that gold is not the currency of the future and that it’s value is consistently beaten by the stock market, yet there are still so many people out there who cling to gold as the next frontier of investment and the next great phase of the American (and global) economy. Even before I started learning economics in college, I never really understood why investing in gold was a good idea. After reading this article, I understand it even less. We know from our study of macroeconomics that periods of inflation are natural, and not only natural but desired in some instances, and are a normal part of the business cycle of the economy. The market naturally has its peaks and valleys, and if we look at GDP over the years we see that the downturns in the market are always followed by periods of growth and expansion. Right now we are in a period of recession, so people are worried that the upturn won’t happen soon enough and are looking for non-traditional methods of savings and investment to try to give themselves a leg up. I think this is one reason why many people are touting gold so strongly right now. Eventually, the market will again begin to expand and I predict that, at that time, the gold frenzy will fade away.
I think that the "Gold Over EUR 1,300 - On Way to ‘Infinity’ on Eurozone Contagion?" article exemplifies some of the major problems facing average Americans today when it comes to understanding macroeconomics and being able to articulate informed opinions about economic policy. The language used in the "infinity" piece is non-specific and includes sweeping generalizations. For example, the author addresses the current Euro-crisis, stagflation in the US in 1970s, and the current recession in America as if they were all caused by the same problem, when in fact very different sets of circumstances and processes led to each crisis. The author also tends to reach significant conclusions without attempting to explain them. For example, he writes that growing conerns over Iran's nuclear program will cause gold prices to rise, but offers no explanation for how this would come about.Many people read poorly informed articles like this and take what they read for wholesale truths, which is dangerous. It certainly doesn't help when well-known figures like Ron Paul are talking about purchasing power decreasing by infinity. With today's internet and social media, articles and opinions like theseare more available than ever, and the so-called credible mainstream media outlets are often no better. Incorrect and poorly written journalism poses a major threat to an informed citizenship.
This article does a great job of pointing out the fallacies in investing in gold trade. Like we discussed in class, people like Ron Paul will stand in front of a large group of people and proclaim something with great confidence, which in turn will convince people that doing something like putting all of their money into investing in the gold standard is a good idea. Instead of relying on talking heads and popularized political figures, people should be doing research and read articles like this one to better understand the ideas they are talking about. In the article they say, “this post is likely to fall mostly on deaf ears”…people who do not wish to change their beliefs will ignore hard evidence seen in research like this. Every single main point has been proven wrong in this article however, as evident by the support seen from the Ron Paul speech, I rest assured that someone who has not read this article would still bravely defend the gold standard with quotes from Ron Paul to back them up.
This article brings me back to a discussion I had with my dad when I was in middle school. One of those commercials claiming, "this is the best time to invest in gold" and "you would be crazy not to buy/sell gold now" came on and I asked my dad why we were not taking advantage of this great opportunity to make money. He responded simply, "If gold was worth so much, do you really think they'd be advertising it to the whole world?" This makes sense, if the value of the dollar was diminishing, and gold really was the next thing to save our medium of exchange, I would want to invest as much as I possibly could in it before anyone else knew. However, the people pushing for investment in gold truly just want the demand for gold to go up. If more people seem interested, the higher the demand, which ultimately means a higher selling price. This relates to the herd aspect of investing that was mentioned in the article. Masses of people find out that a certain section of the economy is making money, so everyone jumps on board, and then the initial buyers just end up selling their stocks for profit. The moral I got from this article was to not be a herd invester because information is not always symmetrical.
The main argument for investing gold is the that the purchasing power of dollar is going down, but the value of gold is less like to fall. People who support the gold standard say that because there is a limited supply of gold, the government is less able to change the value of gold. The flip side of the coin, the limited supply of gold creates a limit on economic growth. If the productive capacity of an economy increase, the GDP of the economy should increase, and with it, the amount of money people have. In a gold standard economy, the amount of money/gold in the economy is hold constant and will discourage economic growth. Another problem with going back to the gold standard is the varied distribution of gold. Countries with rich gold deposits will be better off than those without and will create a huge advantage to those countries. I do not think gold standard is the way of the future.