Former Congressman Ron Paul expresses his view that gold prices are a reflection of the state of the U.S. dollar.
Not surprisingly Ben Bernanke further mystifies the issue by stating that nobody understands exactly how gold prices are formulated.
Although Bernanke is right when looking at short-term fluctuations, from a bird’s eye view he isn’t telling the full story. Paul rightfully points out that gold is a good long-term identifier of the value of a currency.
In theory gold’s value never changes in comparison to the goods and services you can buy with it. So for example a quarter from 1964 or earlier would buy you roughly a gallon of gas. Being composed of precious silver and copper, that same quarter will buy you a gallon of gas today. If you’re still skeptical or curious, this video explains why precious metal is a true store of value in much greater detail.
Today Bloomberg posted an infographic outlining the recent sharp decline in gold prices and it’s negative effects.
It opens with the following blurb, perfectly crafted to pull at heartstrings:
Gold’s swift fall has ravaged hopes and livelihoods around the world – from the 1 million miners in Ghana who scour in the dirt, to thousands of executives and geologists at mining exploration firms that are running out of cash in Vancouver. Gone too are jobs for auditors, bankers and analysts in the finance capitals of Toronto and London. Investors who bet big and lost are shifting assets elsewhere and scaling back retirement plans.
Investors that focus on the doom and gloom here are the exactly the crowd who were hit hardest by the drop. Not only does this segment buy into the hype with vigor, but also approach investing like gamblers by attempting to beat the market.
When soaring gold prices were a hot topic in the media they bought it up, quite literally, abandoning the most basic principal of “buy low, sell high.” It’s all too often overcome by base inclination to side with perceived success, since “everybody loves a winner.”
A prudent, long-term investor shouldn’t be fazed by this shift. These types invest in precious metals, index funds, etc. at steady intervals, stay objective amidst turmoil, and most importantly don’t try to beat the market.
If anything these new, lower gold prices allow the new, or long-term investor to amass gold without breaking the bank.
Now that we’ve entered the bear market before long we won’t be hearing so much about gold and how affordable it has become. And that’s exactly how the smart money lurking in the shadows behind talking heads wants it.