Why not to buy gold

Lots of my friends and students have been using their savings to buy gold, under the belief that as cash becomes less valuable gold will be a safe haven for their assets.

In a normal economy, this might be true. And even in ours, it’s a bit true. As cash and other investments become more transparently worthless, people will look to real materials, commodities, and precious metals as stores of value.

The problem, however, is that the gold market isn’t any more real than any other market at this point. Speculation in gold still far outweighs the use of gold. And “real” speculation through gold – the kind that you or I might do by buying gold or a gold fund with our money – is outweighed by the “fake” speculation done by hedge funds and other pro investors.

Hedge funds are really just a bunch of rich guys who put a few hundred million bucks together, and then *leverage* it to be a few billion dollars, instead. So every dollar a hedge fund guy puts into a hedge fund might be leveraged to a hundred times its original value. This means his dollar – his chip, his vote, and his influence – is a hundred times more than yours or mine. Not just because he’s putting in more real money, but because his money is used to borrow a hundred times its original worth.

So, while part of the reason gold has gone up is because real people are converting cash into gold, the other reason is that hedge fund managers are putting their leveraged borrowed non-existent money into gold as well. And if they get a margin call on all this leveraged fake money – like from one of their other investments – they’ll sell their gold to go cover it. And you and I can’t own enough gold to compensate for the kinds of movements that their buying and selling will produce.

You can make money off gold by beating hedge funds to the purchase, and getting out before they do. But the underlying “real” value of gold as a commodity has almost nothing to do with its current price.

If you want to invest your money in something real, improve the quality and maintenance of your property and equipment, support local businesses and agriculture, put some people through school, clean up some toxic waste, develop a natural fishery. These kinds of investment are truly as good as gold.