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The Root of Gold Conspiracy Theories - Keith Weiner

The Root of Gold Conspiracy Theories - Keith Weiner
By Keith Weiner 2 years ago 6610 Views 7 comments

Keith Weiner is CEO of Monetary Metals, a precious metals fund company in Scottsdale, Arizona. He is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. He is founder of DiamondWare, a software company sold to Nortel in 2008, and he currently serves as president of the Gold Standard Institute USA.

Weiner attended university at Rensselaer Polytechnic Institute, and earned his PhD at the New Austrian School of Economics. He blogs about gold and the dollar, and his articles appear on Zero Hedge, Kitco, and other leading sites. As a leading authority and advocate for rational monetary policy, he has appeared on financial television, The Peter Schiff Show and as a speaker at FreedomFest. He lives with his wife near Phoenix, Arizona.

November 10, 2015

Most people who own or trade gold have a higher price in mind, a price determined by what they think the metal is worth in dollar terms. That’s normal. However, some make a leap from the fact that gold doesn’t trade at this price today, to belief in manipulation. Short sellers—who are sometimes supposed to be illegally profiting, and sometimes said to be not-for-profit—come in to the market and sell the metal down. Or so the theory claims.

This theory is not true, and I plan to show the data to prove it in a future article. For now, I want to discuss the fallacy at the core of it.

The error is dollar thinking.

What do I mean? Simply, most people assess the value of something based on its price in dollars. If nefarious parties could somehow suppress the price of gold, then they could undermine its value. That would be an evil act. How could one not feel something, at such a crime against the natural order? It’s personal too, an attack on your very wealth. You buy gold to protect yourself from a likely dollar collapse, and instead find you are losing your wealth. You’re forfeiting it to the very monetary planners from whom you thought gold would protect you from in the first place: the central banks.

Let me suggest that this is the wrong way to think about it. Gold does not go down (or up). Gold cannot be properly measured in dollars.

Let’s start with an example of measurement. Suppose you’re cutting some boards to build a house. You use a meter stick to tell you the length. For example, a board is 3 meters long. You would never wonder how many boards long a meter is. That’s because a board is not a good measure of length. The length of one board is not the same as the length of another. And, the length can change, for example by cutting it with a saw. The meter doesn’t change, but boards do. Therefore, boards are measured in meters.

The same applies to economic value. The value of the dollar varies from one day to the next and, of course, it falls over long periods of time.

So the question is not: how many dollars is an ounce of gold worth? The question is: how many ounces is a dollar worth? Far less than an ounce, it’s about 27 milligrams.

When you look at this way, things becomes clearer. It’s the dollar that goes down, not gold that goes up (the dollar can also go up, as it has since 2011, due to pressure on debtors).

One implication of this is that a rising gold price does not provide a profit to gold owners. Sure you have more dollars, but each dollar is worth proportionally less. For example, if the price of gold in dollars goes from $1,110 to $2,220, then that’s just the mirror image of the dollar going from 28 to 14 mg gold.

Conversely, if the price of gold falls, it’s just an increase in the dollar. So what? If the dollar goes up, it is not important (or permanent). Why worry if the price of something you don’t own goes up? I didn’t own bitcoin when it went up from a few dollars to $1,200. I didn’t worry about it, either.

Many gold owners do worry about a rising dollar, which they think of as a falling price. Why? They say the dollar will soon be worthless (it will be worthless one day, but not as soon as many say), so they buy gold. And then they get upset when the collapse doesn’t happen, and the dollar strengthens.

The dollar collapse is just their backstory. The real reason they buy gold is to sell it. They want more dollars, no matter what they say about hyperinflation. They want profits, which they think of in dollar terms. As I said above, you can’t profit from a rising gold price (unless you use leverage).

So cheer up. Most people do have a dollar income and assets. A dollar collapse will be a disaster, but a flat or falling price of gold supports the dollar, and hence, most people.

If you have a dollar denominated income or assets, then here is a simple step you can take. Measure it in gold. For example, suppose you have real estate and stocks totaling $1,100,000. Divide that by the current price of gold—about $1100—and you are worth 1,000 ounces. If it goes down next year, despite hard work and risk, then you have become poorer. You would actually have been better off simply holding gold—even if your net worth goes up in dollar terms.

There’s no reason to sweat a drop in the gold price or cheer a rise.

John brown 2 years ago at 7:02 PM
I don't own gold just to sell for a profit. I began saving for college the day my grandchildren were born ( twins ). I soon realized by the time they turn 18 any number of things including a bank bail-in could happen to their money so I invested in gold. I hold physical gold and not in a safe deposit box. They will never know what student debt is thanks to God's gift to man, gold!
EUROHICCUP 2 years ago at 2:30 PM
Few children are blessed that much to have such a forward-sighted and thoughtful grandpa...Even fewer are the grandparents that are so thoughtful....
Ricardo Rolo 2 years ago at 5:57 PM
An education degree is depreciating faster than the value of the dollar.
Save your gold, wait for a market correction and buy rental property. Then when they come of age, give them the income producing asset and let them live / learn debt free.
Myron Martin 2 years ago at 6:31 PM
While your assessment has an element of facts to consider, it does not by any means address the fact that there is a war going on between bankers who are trying to protect their monopoly of money creation (actually just currency) a money substitute and believers in gold and silver as the only honest money that can not be created out of thin air like fiat currency.
It certainly does not challenge the overwhelming proof that bullion banks do manipulate the price of precious metals by various nefarious means when in effect they can buy and sell 100 X the "paper gold" than actual gold in existence available for delivery. It mat be tolerated or even be legalized, but it dozen't make it any less a crime. If I had something for sale, a house or a car and promised it to a hundred people when I have only ONE to deliver and took their money as a deposit, I would rightfully end up in jail, but this Ponzi scheme in precious metals is tolerated at the expense of the average small scale investor. The sad part is that many people who have invested in gold through ETF's or unallocated accounts do not realize that if the institution through which they made the purchase goes broke, they may never get delivery of what they thought they paid for to protect their purchasing power. If they are lucky, they may get a cash settlement, but that defeats the very purpose for which they bought in the first place.
leonard gunderson 2 years ago at 10:39 AM
What happens when they default the dollar ??
John Smith 2 years ago at 1:26 PM
This is a good article, but also contains a fallacy, which is that other prices move in lock step (in dollar terms) to the price of Gold. I particularly liked your net worth example - worth a thousand ounces of Gold. A good way of thinking about it.

Here is my point. If I have a thousand ounces of Gold in a period of rapid inflation, then Gold has probably done only what you described above, left me no better or worse off - except that it protected me against the inflation. However, if Gold drops to $700/oz, your example says that I am now worth $770K, which is true only if my entire net worth is in gold. In reality, if I have the $1.1M in your example - but in dollars, not gold - I can now buy 1571 oz of Gold vs the 1000 oz in your example. So, clearly the price movements do matter to any of us who are not overwhelmingly in gold. Further, even if Gold goes up to 2200/oz, I may still gain value if (another example) real estate doe not go up 100%, as well. Because then I may be able to trade gold for real estate, at a profit.
Sylvanus 1 years ago at 5:12 AM
"Gold does not go down (or up)."
I don't agree. Gold is a commodity, which is subject to the law of demand/offer. Because of its rarity and durability, it has been used as money for centuries, as is the case of many other metals or objects, except with much more success.

Still, the law of demand/offer is at play. If I don't increase the production of dollar but most people start to give gold a higher value, its price in dollar will increase because demand is exceeding offer. So the price of milk/flour/potato/housing may remain constant (in dollar terms) while the price of gold may increase (or decrease).

Now, in a world were currencies are debased and printing is out of control, gold is viewed as an heaven to store wealth. But it may not be... It still depends on whether people will be ready to buy it from you, and at which price. Let's imagine a collapse of the dollar. Will gold emerge as the new standard? I'm not sure. Everyone should have a bit of it to agree to use it as money. I know nothing about gold but experts advocating a sky-high gold price use the argument that it is rare - there may be less than an ounce of gold per person on earth. It may not be enough to make it the new money standard... People having no gold will rely on barter until someone comes up (not sure if gold will be of use in such case) with a new currency (maybe a world currency!) and if they adopt it, they will pay your gold only what they think this currency is worth in terms of gold.

I understand that I am replying to an article posted 1 year ago... ;-)

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