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Does Purchasing An ETF In Gold Protect Your Money?

There are exchange traded funds for all types of investments. One of the most popular today happens to be, you guessed it, GLD or other gold related ETFs. Based on the current gold cost rising and the discussion or controversy as to why ranges from inflation expectations to protection against a collapsing currency. The inflation reason make more sense because the collapsing currency story doesn’t hold true for each and every country or currency around the world, yet gold is certainly sold or bought around the globe.

Even though inflation may not exist currently as measured by governments statistics such as CPI (Consumer Price Index). This is another controversial metric due to the fact that when reporting CPI, the Bureau of Labor Statistics chooses to ignore food and energy from the index. It has been long argued that these items represent a large component of household expenditures, and has been on the rise in recent years, but they chose to report what is called a core inflation number which is also adjusted for seasonality. Seems to be suspect at best.

Current gold cost does not rise and fall based on CPI or inflation. The price rises or falls on expectations of what people think is going to happen, and more importantly what people think other people will do as it relates to buying or selling. These are the dynamics that move markets, not the reported data that comes out after the fact.

As the worlds largest gold backed exchange traded fund, the SPDR Gold Trust (GLD) reports that It’s holdings are over 1,297 tones on December 7 2010. As a side note, if all the gold bugs and bulls decide the uptrend was over, who would the owners of GLD sell all that gold to?

Some gold holders take the stance that they are protecting their money or investments by purchasing or maintaining a position in the yellow metal. It’s not clear what protection they have other than an all out collapse of all currencies, asset prices and other holdings. If that type of Armageddon were to take place, then who would you sell you gold to in an effort to raise money? If there was a currency collapse, what money would you be raising? If there was a collapse of everything, why would gold not participate? These are the questions that never seem to get answered. The common and programmed response is that if the dollar were to collapse, then gold would skyrocket because it will be the only true currency. Again, nobody seems to be able to answer why. It seems that not enough people agree that if there were an asset deflationary spiral, then those with “dollars” would be the best positioned to purchase assets at bargain basement prices.

Notwithstanding the fact that deflation is primarily dismissed as the inevitable outcome in the US and the Euro Zone, and many still point to inflation resulting from the “money printing” that they believe the fed has been conducting. What is NOT being discussed is the twenty year deflation environment Japan has undergone, and the effects on the Yen and their in country assets. They tried to “liquefy” their economy in much the same manner we are today, their asset prices were depressed, the Nikkei has been in a bear market for almost 20 years and yet nobody want to realize the parallels between the US and Japan. In fact when looking at the outstanding national debt, we are very similar to each other.

Buying gold for protection may just be another media manipulated, fund manager created and band wagon excuse to drive prices into an inevitable and probable bubble.

Invest with vigilance.

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