TRADING INSIDER: Here's Why Gold Polarises Traders And Divides The Market

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Photo: China Photos/Getty Images.

Gold in the commodity markets has its true supporters who ardently believe, like Souths and Collingwood supporters, that it will have its day.

But there are also many in the investment and trading community who see gold as a commodity with no real intrinsic value apart from that which it derives from the global jewellery trade.

If you have ever made the mistake of questioning gold’s real value when talking to a gold bug, then you will be bombarded by the reasons you are wrong. They’ll tell you why gold is going to increase in value, why it’s headed to $5000 an ounce, and why the global fiat money system will eventually collapse.

Some of the gold bugs’ ideas will sound plausible, some not so. Some ideas, like the collapse of the money system, might seem downright crazy to you.

But to the dedicated gold bug they are reality.

On the other side there are traders who think gold has no value, who wouldn’t touch it because it costs money to own (you have to store it as opposed to earning interest on bonds or dividends on stocks), and that it is held up by a religious fervour, rather than any sound underlying fundamentals.

But what is it that drives the diametrically opposed views, with which gold is held by the bugs that love it and the haters that well, hate it, and think it’s a dud investment?

As far back as 1873 with the passing of the Resumption Act in the United States the status of gold as a unit of monetary account, a store of wealth and value, has been hotly debated.

Milton Friedman, writing in in a Monetary History of the United States 1867-1960, says that the Resumption Act which changed the US monetary system from a bimetallic one – where both gold and silver had value – to a monometallic one, where only gold was recognised, set the course of US politics all the way until the 1896 election.

Indeed to get a sense of how vitriolic the gold-silver debate was during that period, the working papers which became the basis for the book titled “The Crime of 1873” have some spectacular quotes from prominent US politicians of the day.

US Senator William Stewart said in 1889:

I am persuaded history will write (the Act of 1873) down as the greatest legislative crime and the most stupendous conspiracy against the Welfare of the people of the United States and of Europe which this or any other age has witnessed.

He wasn’t alone. William Jennings Bryan the Democratic Presidential candidate in 1896, 1900 and 1908 said in 1896:

“You shall not press down upon the brow of labor this crown of thorns.
You shall not crucify mankind upon this cross of gold.”

The gold-silver debate is long finished, but the debate over gold’s true value and role in the financial system still rages.

Many gold bugs believe the system of exchange that we all know and use in our daily lives – what is called fiat money – will ultimately collapse in a recognition that a currency backed only by the “hopes and dreams” of those who use it, not a metal such as gold, must ultimately fail.

Those who say this is bunkum note the difficultly of using gold as a unit of exchange. It is inherently indivisible. It also has to be dug out of the ground with the money supply, so is subject to a natural constraint on a mining company’s ability to dig it up and mine it.

The gold price chart over the last decade.

From early 2000 till late 2012 the gold bugs were winning the debate. Gold climbed from a low of around $250 an ounce to a high just above $1900 in September 2011 and a slightly lower peak around $1800 in September 2012, before the selloff which culminated in a low of $1187 an ounce earlier this year began.

All of this has intensified the debate of gold’s true worth.

The bugs still think gold will head to $2000 or even $5000 and that super-low rates are going to eventually see inflation and the end of fiat money. While those who believe gold is only held up by hype and jewellery demand out of China and India see it heading back below $1000.

The Bitcoin Comparison

But maybe the latest gold substitute has the answer to the question.

Bitcoin’s wild ride.

While Bitcoin has only been around for a few years, it shares many of the same attributes as gold.

It needs to be mined – by complex algorithms rather than machines, but still mined.

It has a cabal of zealots who believe in it as a store of value and a medium of exchange, while the vast majority of the investment community and the public see it as a sideshow.

And it surprised all the unbelievers with an amazing run up in price before – like gold – it came tumbling down.

The unbelievers weren’t exactly right either. Bitcoin crashed from unsustainable highs but at $500 per coin it is still incredibly valuable.

In the end the gulf between the gold bugs and naysayers is too big to breach – but one thing is certain: for more than a century, gold has been a safe haven in times of trouble. The GFC and the low interest rates it spawned have been gold’s best friend and one day in the future when market volatility rises again and fear takes hold gold will again come into its own.

But the bugs will always think that move is just around the corner and the naysayers will never agree – the debate has been raging for 150 years and doesn’t look close to agreement yet.

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