“Right now, gold is less than an ideal investment.”


Gold prices are now down slightly year-to-date, 13% below its 2012 highs of near $1,800, and 18.7% below its all time high of $1920.

I spoke with Paul LaMonica of CNN/Money about having Gold exposure, and more importantly, how investors should think about Gold:

“Ritholtz, who said his firm does have a position in gold, said that having some gold investments makes sense. Gold should rise when the U.S. dollar is weakening and inflation is a worry.But he added that the biggest problem with the metal is that it’s not as easy to objectively value it like a stock or bond. Still, he said some investors treat gold like a “cult” and refuse to believe that the prices can ever go down.

“Gold doesn’t have any earnings. It doesn’t pay you interest. It’s a shiny yellow metal. Its value only comes from its relative rarity. It should trade on supply and demand,” he said.

Gold is a commodity first and foremost, not a currency. Commodity prices, even for something like gold that doesn’t have as much commercial use as other metals, tend to closely track consumer demand. So it should be no surprise that gold prices are now tumbling.”

The other factor to note: Inflation is rather modest versus the 2003-07 period, primarily due to unemployment and capacity under-utilization. The case for gold gets stronger in a money printing environment when the economy gets better, and inflation picks up.

Last July, I noted “Gold was a trade, not a religion” at a conference. There were scattered boos and catcalls.


‘Au’-sterity for gold as prices plunge
Paul R. La Monica
CNN/Money May 14, 2012

Category: Gold & Precious Metals, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

45 Responses to “Gold Is A Commodity, Not A Currency”

  1. Moe says:

    “scattered boos and catcalls”: that’s when you know you’re on to something…

  2. dead hobo says:

    GLD: Charmin without the soft

    Don’t worry. Gold is up 60 cents as I write this. That’s ‘real money’ … pun intended.

  3. cognitive dissonance says:

    That is straight up incorrect on a factual basis. Gold is a currency. If you have any doubt — look up the definition of a currency.

    From Wikipedia: “currency refers to a generally accepted medium of exchange”

    Being a currency does not in fact guarantee that your value will rise but it still doesn’t make you any less a currency.

    Gold happens to be the only universal currency.

    It also happens to be a currency with finite supply as opposed to limitless supply and therefore one can debate the inherent attributes of that. Again like any other asset its value will rise and fall.

    Based on what I have read on this blog I doubt your claim that you are long gold. If you were long gold like those that you mock — Zero Hedge, Jim Grant etc you would be very long gold.

    Never the less you are a great blogger and your site is fantastic. Keep up the good work.

  4. BennyProfane says:


    When was the last time you, or anyone you know, used Gold as a currency?

  5. Petey Wheatstraw says:

    The dollar is king. Yup. Nothing beats a greenback. It’s a currency, not a commodity.

    The dollar is up and everything else is down. Surprise, surprise. Money fleeing any asset class must run to the dollar first. Any money smart enough to run to the dollar is smart enough to use it as a stepping stone to something else.

    A strong dollar is the Fed’s worst nightmare.


  6. dead hobo says:

    cognitive dissonance Says:
    May 15th, 2012 at 8:12 am

    That is straight up incorrect on a factual basis. Gold is a currency. If you have any doubt — look up the definition of a currency. From Wikipedia: “currency refers to a generally accepted medium of exchange”
    Being a currency does not in fact guarantee that your value will rise but it still doesn’t make you any less a currency. Gold happens to be the only universal currency.

    Try spending it at Best Buy, the grocery store, the vending machine, a slot machine, Wal-Mart, for gas, or for anything besides paying off a bookie or cash from the pawn shop and then compare your results to the dictionary definition. It’s not a currency. It’s a cult. Much like Apple, but worse.

  7. Freestate says:

    BG – Academic research has shown that gold is not just a hedge against inflation. It actually does well when real interest rates are negative. That is the only explanation that works for why gold did well in high inflation times in the 70′s and in low inflation times such as the we have today. In both periods real interest rates are negative so it makes sense for investors to hold a physical asset that won’t lose value in real terms. That is the main story that most investors and pundits don’t seem to understand

  8. Old Rob says:

    Gold can be another medium of exchange such as the US dollar.

  9. urbandigs says:

    Gold is more of a barometer of faith in fiat currency across the globe and was used as a hedge in a deflationary environment as CBs enacted policies of QE and govts took on more debts to stimulate/bailout. When inflation does really rise, gold probably made its move already. Also, lets not forget that gold did rise big time in late 2008 and early 2009 as the dollar rose/swelled as money flew into the safety of greenbacks and out of most other risk assets. It happened before, it can happen again. Just sayin. I think many who view gold as a currency do so because of our history and that gold is finite, and paper currency certainly is not.

  10. cognitive dissonance says:

    Dear Dead Hobo and Bennie:

    it is sometimes worthwhile to look outside the borders of the United States to determine what is or may be going on in the world.

    Billions of people across the globe view gold as a currency.

    Should these people decide that baseball cards are currency then blammo — you can trade your Vida Blue cards for goods and services. That’s how currencies work — communal acceptance.

    Dollars are the same now as T-Bills — they yield nothing and we hope that due to their wide accepatnce and broad dissemination they will continue to be accepted for goods and services and in fact they will most likely be.

    But remember this — Government debt is associated with a specific Government NOT an entire populace. Good luck to both of you. And Best Buy…

  11. Petey Wheatstraw says:

    All of this value migrating to the dollar is waiting for the next safe haven: Facebook stock.

  12. BennyProfane says:


    “Billions of people across the globe view gold as a currency.”

    Really? Where? Who? Are we talking about all of that gold in closets in India and China?

  13. jaymaster says:

    I consider it to be insurance (or a hedge if you will, since someone I know once said “everything is a hedge”.) IMO, everyone should own a little, but only after the basics of food, water, shelter, and protection have been bought and paid for.

    If it exceeds 5-10% of your net worth, that’s speculation. Nothing wrong with that, if that’s your thing.

    And it IS magical. Whenever I’m depressed, I get out my little bag of gold dimes and ounce coins, and run them through my fingers and drop them on the table like a miser from days of old. It never fails to bring a smile to my face.

  14. Petey Wheatstraw says:

    BennyProfane Says:

    Really? Where? Who? Are we talking about all of that gold in closets in India and China?

    Central Banks. All of them.

  15. BennyProfane says:

    Petey, if I want to read silly responses like that, I’ll go over to Naked Capitalism.

  16. dougc says:

    If gold is not an inflation hedge , explain why the dollar has lost> 90 of purchasing power and gold has >6000% appreciation since the Fed was created. I don’t own gold.

  17. Irwin Fletcher says:

    This is debatable. David Rosenberg claims that Gold trades like currencies not commodities. Cognitive, hold your long gold and you may be the one laughing in the end.

  18. VennData says:

    I am a single issue voter, Gold confiscation. I support the total and complete confiscation of all gold in the US by the next election. There are millions of us, single issue voters and ALL WE care about, it’s Biblically ordained, ney, demanded. …that the Federal government confiscate your gold immediately. Sign our petition now….

  19. whskyjack says:

    Venndata, even my gold teeth? I don’t know……….


  20. CSF says:

    “Try spending it at Best Buy, the grocery store, the vending machine, a slot machine, Wal-Mart…”

    So the pound, Euro, Yen, and Yuan are not currencies, because they don’t accept them at an American Wal-Mart?

    This debate is an either/or fallacy – in truth gold has properties of both currencies and commodities.

  21. techy says:

    its possible that bottom may fall out for gold. what if indians aborted their binge buying followed by chinese?

  22. Expat says:

    “Its value only comes from its relative rarity. It should trade on supply and demand.”

    Over the past six thousand years we have mined about 165 000 MT of gold. Of that gold, about 90% is around. It’s on your fingers, in your earlobes, in your home safe, and in Fort Knox. The rest is at the bottom of the ocean in sunken Spanish galleons and WW II Japanese submarines.

    Gold is a shiny yellow metal which might be relatively rare in our planet’s crust, but once it’s dug up, it never goes away. Warren Buffet’s famous quote about gold is all too true. Why else is gold “always” in contango?

    Apparently humans need a means of exchange. Gold fits the bill for many reasons. But what is its intrinsic value? How can we possibly call gold “real money”? The only reason is that it is traditional and very hard to create (if at all). But it’s nothing special.

    Why not use diamonds as currency? They are even more worthless than gold!

  23. AHodge says:

    i love the smell of my pissed off audience in the mornin!!!
    twisted. i mean that in a good way

  24. Stuart Douglas says:

    Or, is it when you say that gold is a currency you are talking about when some major world wide calamity happens. You know complete system shutdown / disruption. Will it be a currency then? Don’t know. Not sure if I would even want to be around.

  25. jaymaster says:

    We can argue all day over whether it is a currency or not (I think it is). It is also certainly a commodity. And as a hedge against deflation, it looks pretty good.

    But as a hedge against inflation, it has a pretty spotty track record. Just ask anyone who bought in 1980 or 81. And then there is my anecdote of an ancestor who bought 1200 acres outside of Philly for 4 Oz of gold/2 Oz silver (or maybe it was the other way around. Doesn’t really matter). Which is worth more today?

    Sad to say, the best hedge against inflation is probably debt. If you expect inflation on the horizon, the best bet is to lever up the debt. Buy a house (or two). Pay as little down as possible. If you already own one, take out a new mortgage. Lock in these 4%-5% rates for 30 years while you can. Hell, go for 40 years if you can get it. Set up a margin account and buy energy and consumer goods stocks and REITS. Drop your cash and bond exposure to the lowest comfortable level.

    If/when I expect inflation, this will be my strategy (assuming I’m not too close to retirement by then). But I still fear the threat of deflation, and needless to say, debt is the last thing you want in that case.

  26. DarthBeta says:

    ‘Over the past six thousand years we have mined about 165 000 MT of gold’
    How does anyone prove that?

  27. JKoen says:

    Gold bugs are so ridiculous. They seem to always miss the point of liquidity and volatility risk. That is why I became a Bee, and converted all my assets into honey. Any argument you make for gold will hold true for honey as well. But the best part is when I learn my lesson about volatility risk; I will at least have honey to eat.

    BTW – I don’t think Barry is saying don’t invest in honey, but just make sure it is not the only thing in your cupboard.

  28. BennyProfane says:

    “‘Over the past six thousand years we have mined about 165 000 MT of gold’
    How does anyone prove that?”

    The same way they prove that the Earth’s temperature has risen 2 degrees in 300,000 years. Or that Jesus was chased by T Rex.

  29. CG says:

    People saying that gold is purely a commodity and nothing more is definitely a bit rich. I don’t see the IMF and Central Banks of the world stocking up on cotton, copper, lumber, and soybeans. The USA doesn’t have a small army guarding the vaults at Fort Knox because it’s full of coffee beans and aluminum.

    Gold is definitely a currency/storehold of wealth… but obviously different in a way because, as other commenters have pointed out, you can’t use it at your local best buy or walmart as a medium of exchange. But you can’t deny that it’s a major storehold of wealth of great importance to the most powerful institutions of the world, and has been for thousands of years.

    Barry’s main point though still holds that it should trade like a commodity (based purely off supply and demand). The different thing with gold though is that those supply and demand dynamics (specifically, the long-term secular dynamics) are based primarily on humans’ desire/lack of desire for it to serve as a storehold of their wealth, as opposed to the more understandable/economic commercial reasons that apply to other commodities. (Major changes in supply notwithstanding)

  30. realgm says:

    BR, I would have to disagree with you on this.

    Money is a medium of exchange. For many centuries, gold has been used as a medium of exchange and I am pretty sure that you would be able to find someone willing to exchange goods for gold coins now and in the future. USD is a currency, but all paper currencies are just credit. It’s note saying the issuer (gov’t) owe you something.

    Would you rather have $1600 USD or a gold coin that you have to hold for 20 years?

    Gold has all the properties for being money (medium of exchange) and it will be a medium of exchange for many more years.

  31. cognos says:

    Gold is up about 4% annually, over the long-term.

    It has some HUGE LOSSES… like being down 50% from 1980 to 2000. Ouch!

    Don’t see how I love either of those… poor long-term record, big moves down. So its dangerous, without real upside. Hmm… I’ll go with technology and consumer businesses.

  32. Braden says:

    I was at the Agora conference, BR. There weren’t scattered boos and catcalls. Maybe a few eye-rolls and head shakes. Are you coming back this year?

  33. cognos says:

    Gold is up about 7x (?) since lows around 2000. Yes?

    AAPL is up about 100x.

    I don’t know what YOU do… but I look for really good investments. They make my portfolio. They don’t include gold.

  34. cognos says:

    Real estate seems to be a far superior long-term “safe” asset…

    Plus it cash-flows 4-8% AND gets unreal tax treatment in the USA.

    I would trade all gold (and mattress USD) for real estate. As long as you don’t lever to the hilt at the top of the bubble, it is THE source of MANY of the worlds $B+ capital pools and families.

  35. seneca says:

    Gold is hard to value since it depends on supply and demand. In contrast, stocks are easy to value. You just have to know the company’s cash flow for the next 30 years and plug those figures into a simple formula that also includes the rate of interest over the same three decades.

  36. realgm says:

    I am not saying Gold is the best investment. It is a store of value. It is a vote of no faith in the FED and the gov’t.

    Investing in stock could potentially generate much higher return than buying gold. However, you have to be a really good stock picker.

  37. Godswork says:

    Great article by Paul Brodsky that you posted this morning. Thanks for posting.

  38. Eidesis says:

    The biggest problem with discussing gold is that there is no common framework. A few points in that regard:
    Money has three functions: medium of exchange, unit of account and store of value. Currently, gold is neither a medium of exchange nor a unit of account. However, in a world of negative real returns on bonds and rampant money printing, it is a store of value. A store of value seeks to preserve the purchasing power of savings whereas an investment seeks to enhance this power. Therefore, over time, gold is not an investment. Comparing gold to Apple stock is like comparing holding hard currency cash to a stock portfolio. Another important point – cash does not provide any return unless it is exchanged for an IOU of a bank or another obligor. A bank deposit is NOT cash; it is a promise to pay cash on demand. Gold is not anyone’s promise, it is a valuable metal in limited supply and, regardless of any arguments about its value, it has a 2,600 year unbroken track record of performance as a safe haven. As such, there is no need to believe in it or not to believe in it just like one may not like the work of Rembrandt and, therefore, believe it to be worthless. In fact, it is not worthless because a Rembrandt, just like gold, is a valuable asset in limited supply that has earned a global critical mass of demand. It is that simple.

    In regards to the argument that gold value is unanalyzable as it has no cash flows, the point is that financial assets with cash flows are equally unanalyzable since the risk free rate is artificially controlled and risk premiums are manipulated. In other words, gold is not attractive when financial assets’ values are based on the freely established real cost of capital and produce real returns denominated in hard currencies that maintain purchasing power.

    Finally, it is right to view gold price as a function of supply and demand. We know that supply is limited but what drives demand? In the West, where investors have not lived through a currency crisis or a sovereign debt crisis in 60 years (much longer in the US), the “go-to” safe havens have been $ bank deposits and US treasuries. Since the US can print any amount of $’s, treasuries do not carry any default risk but thinking that the $ will maintain its purchasing power is no longer a safe assumption. Allocations to gold are minimal in the West but if debasement continues, investors will need to seek alternative safe havens, which would dramatically increase demand for gold and its price.

    Therefore, an allocation to gold makes sense. Financial asset valuations are based on the artificially-depressed discount rates and the cash flows are denominated in currencies that are being debased – it is only a matter of time before the majority of investors wake up to reality.

  39. [...] Gold is a commodity, not a currency.  (Big Picture) [...]

  40. Sunny129 says:

    Gold is a just a ‘trade’ whose ‘perceived’ value depends on ‘perceived’ supply and demand.

    I have been earning net+ by trading options(calls, covered calls and puts) in GLD and GDX, without getting emotionally attached to any one position. I did have some mutual Funds, sold them all except for rypmx for trading putposes on intermediate term. It is no different than trades on oil related stocks/Etfs.

    Money printing+ credit creation along with increased velocity will bring back inflation but not during balance sheet recession. All the ‘money printed’ is back deposited at Fed by capitally impaired Banks. Deleveraging is still going on by the consumers and also Corporations. China is slowing down ( hard landing?) which will affect Brazil, Australia and Canada.

    All the ‘debt on debt’ out there has to be addressed – BKcy, re-structured or forgiven before any serious inflation breaks through. Till then just TRADE on perception/expectation vs REALITY, rhetoric spewed by pundits, hour by hour,every day in MSM aka CNBC!

    Good Trading!

  41. Tulips says:

    I own a small amount of gold and silver too (<5%); I don't consider it a trade, I treat it as insurance. I figure if central banks around the world find it necessary to own a little, why shouldn't I? One of the reason I like owning some metal is that I can store it myself and there need not be any record of a transaction.

  42. DeDude says:

    Actually gold is a religion.

  43. ldevaan says:

    The main difference between gold and a currency is the interest you get on a currency.
    Buying gold is pure speculation. You can also buy paintings, or whatever you think will increase in value in the future.

  44. comet52 says:

    The guys at Zerohedge just told me you are excommunicated for this, BR.

  45. DiggidyDan says:

    Wise man once told me, there are two things you never do with teh crazy: never argue with it, and more importantly, never stick your dick in it.