Interesting fundamental perspective on Gold

I found this very interesting article regarding gold and it’s fundamental driving forces. I agree with the points so much that I thought I’d repost it, as it essentially says a lot of what I believe about gold, written succinctly. This post was taken from Jake Honeycutt’s Kaching wall-posts page:

We seem to be in the midst of GOLD-MANIA! It's become the next real estate ... touted by everyone as a "can't lose" investment. Except, almost none of these same people make any appeals to its fundamentals and most seem to ignore the fact that it's been jumping upwards based on buying from three groups:

(1) Central banks
(2) Gold ETFs
(3) Goldbugs who believe hyperinflation is coming

Central banks have historically bought right before prices start to go down (which makes sense since they are the biggest buyers of gold and would force the prices to go upwards when they are buying).

Gold ETFs are buying like crazy only because more and more people are investing via them. But once momentum runs dry, there's going to be a big void in gold purchases.

The hyperinflationists have never had much of a coherent argument to begin with. A rise in sovereign debt does not mean a massive rise in money supply or inflation. In fact, the exact opposite has been true in Japan. I'm not saying that we won't eventually get high inflation here in the US; it's possible, but it's not going to be "hyperinflation" and the Federal Reserve will almost inevitably stomp it out once it starts.

More importantly, however, recent evidence suggests we are drifting back towards deflation and M2 money supply only increased 1.9% in 2009 --- hardly a sign of hyperinflation. If anything, it's terrifying b/c it might signal a return to deflation.


symboltrader said...

Interesting take on gold, the most psychological of all investments. Little intrinsic value or use, but coveted by so many because everyone else wants it too.

I turned those NEP shares I bought in the 8.60's around in the 8.90's. It was something I guess.

Narayana said...

Yeah, well done with that NEP trade... nice quick profit.