E Looking Back, Looking Ahead - How Low Can Gold Go?

Seems like each year we are treated to calls for gold's next big move. We heard it last year; and the year before, too. And the year before that. It may not be a broken record, but it is the same song.

Predictions for gold's price are more than guesses, but they might as well be just guesses. That's unfortunate, because no small amount of time is spent trying to analyze gold. And it is time wasted.

Most of the analysis is faulty. Not only is it faulty, it is sometimes overly complex. The complexity exacerbates the problem. How do you analyze something that cannot be analyzed?

“This type of investment (...assets that will never produce anything...) requires an expanding pool of buyers, who, in turn, are enticed because they believe the buying pool will expand still further.Owners are not inspired by what the asset itself can produce -- it will remain lifeless forever -- but rather by the belief that others will desire it more avidly in the future.”-- Warren Buffett Feb 2012

Buffett is both right and wrong. He is wrong in characterizing gold as an investment. But then, of course, so is nearly everybody else. Gold is not an investment. But he is right "that (it) will never produce anything" and that "it will remain lifeless forever".

The claim that owners are inspired "by the belief that others will desire it more avidly in the future" is more telling. It points up the critical flaw in nearly all analysis about gold.

Even those who recognize gold's role as money, miss the boat on this one. No matter how much others "desire it more avidly in the future", gold's value will not increase. The value of gold is stable and unchanging.

Gold is not subject to traditional laws of supply and demand. Its value is in its use as money. And, as money, it is the measure of value which has been used historically to price other goods and services.

Analysts and investors who expect to profit from large increases in the price of gold do not understand this. If they did, they would temper their expectations.

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Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN'T, AND WHO'S RESPONSIBLE FOR IT and  more

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