The Selling of Gold

Over the last several months, I’ve seen a continuous increase in the number of advertisements out there for gold. For me, this reached a fever pitch yesterday, when a local radio station I often listen to apparently sold a one hour infomercial in which two pitchmen were incessantly talking about how great an investment gold is in the current marketplace – and, obviously, talking about their own business from which you could buy gold.

Obviously, these ads have popped up because of the current economic conditions. The fear in the air is thick, and it is considered conventional wisdom that gold is a safe place to hold your money in times of uncertainty.

Unsurprisingly, these salesmen are capitalizing on that sense of fear. These individuals were cherry-picking quotes from news stories to prove their suggestion that the economy is in meltdown. They mentioned such things as a 4% plunge in retail sales during the holiday season, the sixteen year high in unemployment, and other rather disconcerting news stories about the current economic situation.

Not mentioned, of course, were other news articles like the recent sharp drop in new unemployment claims or the fact that business and individual balance sheets are getting healthy fast or the presence of many signs that we’ve reached the bottom.

What’s the next step in the sales job? They make it seem easy and safe to invest in gold. They provide all the help you’ll need with just a single phone call or a click – an easy solution to all this fear.

There’s nothing at all unusual about what they’re doing. It’s salesmanship 101 – and much of our economy runs on it. It’s all about creating the appearance of something better than what you have now.

But it works particularly well with gold, and here’s why.

Almost every investment is driven by supply and demand. If there’s more of something available – meaning there are more people selling it than buying it – then eventually it will cost less. Think of it in terms of the Beanie Baby phenomenon of the late 1990s – when the price was rising, there were many more buyers than sellers, but once the buyers dried up (or turned into sellers), the price fell rather quickly.

Gold is no different. When there are more buyers than sellers, the price goes up. When there are more sellers than buyers, the price goes down.

However, gold has a special factor that doesn’t really exist with many other investments: hoarding. Most of the gold that exists in the world is being hoarded by someone in the form of jewelry, gold coins, and so on. Think of wedding rings – once these items are made, they’re essentially hoarded. Large banks often do the same thing – they have tons of gold and they just sit on it, never intending to sell it.

That means that, quite simply, there isn’t that much gold available to be bought and sold at any given time – and that means that even a slight increase in the number of buyers can send the price skyrocketing and even a slight increase in sellers can send the price downwards. That’s why the price fluctuate so much – if one big hoarder decides to sell, it can easily affect the whole market.

That leads us back to our salesmen. They’re talking fear and proposing buying gold as a way to make things safer. If you follow their suggestion, you become a gold buyer – without another seller joining the party. That means the price goes up slightly – you take some gold off the market and hoard it. Not only that, they make a little bit in the process by serving as your broker.

No wonder the economic downturn has brought out the gold ads in abundance.

I’m not claiming that gold is in any way a bad investment – it’s not. But it’s not the be-all end-all solution that it’s often being sold as. Gold is fine as a small part of your overall financial situation, but don’t move all of your money into one asset, ever.

And, as always, be most cautious when a salesman is using the hard sell to convince you to do it.

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  1. Dean says:

    My radio station also run’s commercial’s about the “recent” rise in gold price’s.You need to remember,these ad’s were probably written 6 to 12 month’s ago! Notice they don’t mention the recent drop in price’s.Sure,it’s a buying market now,should and if you have the risk potential.

  2. xepe71 says:

    There isn’t so much gold in the world…

    http://money.howstuffworks.com/question213.htm

    In volume, something like a cube with a 25m side, or roughly something similar to 50 houses filled with gold!

  3. 42 says:

    It’s when you have all the ads on TV/radio, and when average schmoes are talking about it, that it’d be a time to SELL gold.

    The ads also don’t mention the horrific bid/ask spreads, nor the huge premium for coins, nor the steep commissions.

  4. Hal says:

    Dean makes a good point about the ads. But you are right I think about the way things work in the gold world. There are other factors in play too, like Comex and government holdings. One really doesn’t know how much inventory of gold they have because no one’s done an inventory as far as I know. And a number of goldbugs are screaming price manipulation. Of course markets are all about manipulation.

    And like Dean, said, gold is down right now. I just checked ExactPrice and it’s trading at $821.90 an ounce right now. Down over last week because apparently the dollar is still strong in spite of all the bad news on the street.

    All that said, I think investing in gold is still a good thing but one really shouldn’t put all one’s eggs in the same basket.

  5. J says:

    I’m extremely wary of things sold on late night TV.

    Toilet paper, guns, ammunition, alcohol, medicine, food and cigarettes are going to be much more valuable in a barter economy, anyway. :)

  6. I too have noticed the increase in gold ads. I actually was working out a stand up bit about the inner workings of these companies.

  7. My view is that gold is often marketed and purchased as a hedge against turmoil and fear. Companies increase in value when they innovate, gold increases when there is high unemployment, inflation, and war. It’s a valid strategy to make money, and there are reasons to hedge against such cycles of life, but I can’t get passed the negativity factor.

    Any investment in something other than yourself and your family is only as good as someone is willing to pay for it. If things get really really bad, wouldn’t practical sustainable items like a paid for car, an emergency fund, no credit card bills, be worth more in piece of mind than a gold portion in your portfolio. just my 2 cents.

  8. Karen says:

    Hate those stupid commercials. I better use J’s list and go shopping!!!! Almost out of tp!!!!

  9. The Personal Finance Playbook says:

    I hate those infomercials, too. In my mind, there’s no way to give your product less credibility with me than to make an infomercial about it. Tacking pitches, bad acting, it all makes my stomach queasy.

    “Buy my real estate seminar. Getting RICH is SOOOOOO EASY!!!!! Anyone can do it! Why aren’t you?!?”

  10. Mike says:

    Hey Trent, while I agree, I inherited some Gold Spanish coins that are worth a lot. I’m hoarding them, but another factor in the rare minerals aspect is that gold mining is low lately and gold has been widely used in consumer electronics which also has affected its price over the past decade.

  11. Shevy says:

    @J
    You’re right that all the things you mention are important in a barter economy. Gold is bulky, heavy, expensive and you’re never going to pay for your morning coffee with it. It has a place in moving a larger amount of money from point A to point B (as do diamonds). Either gold or diamonds could be how you’d pay for a vehicle or buy land or make a down payment on a house.

    But for day to day living, if the monetary system were to really tank, a bag of “junk silver” would be much more useful than gold bullion or Krugerrands. (For anyone who doesn’t know, “junk silver” is pre-1960something silver coins that actually contain silver and therefore have a value related to their silver content.) You could give someone a few quarters or a silver dollar for a small purchase and it has the benefit of still being legal tender. But it’s a way to give the seller more value than just the coin’s face value so it’s particularly useful when there are price controls.

    Do I think the global situation is going to come to that? No, not really. But there was a time during WWII when people in certain countries needed a wheelbarrow full of money to pay for necessities like bread. Do I have either gold or silver? Other than an almost incidental amount of junk silver, no. You buy it by the bag or half bag, with a bag containing $1,000 in face value coins but paying for it at the price of the silver content.

    One more important fact for anyone contemplating buying either gold or silver. Take physical possession of it when you buy it. Don’t leave it with the seller for safekeeping. Or, if the price should go far higher, you might find that he’s resold it to someone else! Don’t think it could happen to you? One word. Madoff.

    And listen to Trent. Gold, silver, diamonds and the like should have no more than a *small* place in your overall investment and saving strategy. Don’t buy them at the expense of more basic strategies. If you have credit card debt you have no business buying gold.

  12. Ivy says:

    Not to mention that I’ve seen a ton of late-night infomercials for SELLING your excess gold. Encouraging people to stop hoarding and get cash instead. Now wouldn’t that make the price drop? The only people making money here are the middlemen.

    I suspect the same people are behind both sets of ads. Sell your excess gold for cash (at a low price) and buy gold for security (at a high price).

  13. Marc says:

    They interviewed a guy on NPR the other night who said that the total amount of gold existing in the world right now would fill up no more than two Olympic-size swimming pools. Interesting visual.

  14. Cyan Squirrel says:

    Something worth mentioning: when you buy gold, unless you are actually in possession of the metal, you are merely buying PAPER that says you own some gold (have a claim on it). It is no different than a stock in that sense. The paper-based markets are in for some serious transformation, and I think anyone who “buys” a sheet of paper that says they own gold is still playing the racket that got us into this whole mess to begin with…called a BUBBLE.

    Gold may very well be increasing in price in real terms due to supply (fixed) and demand (variable), but like the soaring stocks of yesteryear, unless you have the gold IN YOUR POSSESSION, you merely have a claim. As they say, possession is 9/10ths of the law.

    I for one am preparing for the coming dollar devaluation by buying essential goods NOW, while my money is actually worth something. Gold…can’t eat it or heal with it, it won’t do you any good when push comes to shove.

    I highly recommend George Ure’s site/blog, http://www.urbansurvival.com (www.urbansurvival.com/blog for blog format of the same content), which has excellent, down-to-earth economic analysis for us commoners. He writes “peoplenomics”, too.

  15. Bill in NC says:

    It’s a great time to sell gold as the most likely doomsday scenario (if you’re obsessed with such) is a deflationary depression.

    From houses to vehicles to consumer goods to (unfortunately) workers there is a massive oversupply relative to current demand.

    Right now you can cash out your physical gold at a large premium over its spot price (just think of that Krugerrand as a $1,000 bill)

  16. Jillian says:

    Everyone I know who knows anything about the economics of investing in gold bought theirs early last year in anticipation of the current gold fever. Even if you’re slightly interested in the idea, now is not the time to be buying.

  17. Jim Lippard says:

    The spot price of gold in early 2008 was actually higher than it is now–on January 17, 2008, it was $914/ounce.

    I agree with Bill in NC, in that I think over the next year or two deflation is more likely than inflation as a worst-case scenario (hopefully avoidable). Of course, if the economy starts to recover on its own, and the quantitative easing going on is excessive, we’ll then see inflation. But for the last year, cash has been king, and the currencies that have held up/gained the most over the last year are the yen, yuan, dollar, and euro (in approximately that order).

  18. Jen says:

    One good thing — I got some pocket money a few months ago when prices were higher by selling some broken 14K jewelry to a local estate jeweler that was actually going to use it to make jewelry.

    Someone I know tried the “gold kit” thing, where you send in your jewelry in a special envelope. Their scam is to send you a really small check, but if you don’t send it back it by a certain time, you automatically have accepted that price and can’t get your jewelry back. In her case, she barely had enough time to send the check back before the expiration date. Don’t do it, it’s a huge ripoff. If you do want to sell gold, go to a jeweler so you can get an offer before you hand anything over.

  19. Joan says:

    Trent: I thought you lived in Iowa. You must be getting a much different news station than I am. I’m hearing and reading about all the jobs lost in 2008. Not all of them get unemployment benefits. And the people who do get the benefits only get them for a certain number of weeks. If you see signs that we have hit bottom, share them with the rest of us. Gold has sky-rocketed in price in the last three years, while stocks have gone down. I’d rather have gold that will hold it’s value, than paper that can go up or down depending on several factors that no one can control. I agree with Jillian that now is not the time to be buying gold for investment purposes, but for having buying power if things get worse, gold and silver are the way to go.

  20. friendlyfire says:

    have to agree w. Joan re the meaning of the so called drop in unemployment claims.

    Much of that was due to temporary seasonal work in retail – and, most importantly, thousands of people have exhausted their benefits. Those folks are not counted anymore, but they are just as unemployed.

    There are also discouraged workers who are one of a dual family income, who have reluctantly become part time, underemployed at low wages, or involuntarily “retired”.

    I live in Michigan, where the reported unemployment is at 9.2% but the actual rate may be closer to 16% (per a recent article in the Detroit Free Press). And no, my work is not related to the automotive industry. This recession is FAR worse for employment than the one in 1980-82 which you may or may not have experienced and I see no signs of any real job creation.

    I compliment you on an overall good article, however.

  21. Mike says:

    I really get a kick out of these pitchmen. Touting gold as a wonderful investment. “Investing” in any commodity is pretty much simple speculation as gold has no way of producing revenue or innovation or any value other than the market price of itself like oil or wheat or even pork bellies. If a person were really looking for an investment; what about stocks? Beaten down and undervalued as fund managers hold fire sales to raise cash, even good stocks are value down right now.

    Remember- buying low (stocks are at a recent historical low) and selling high (gold is at the higher end of recent prices). Thats what makes a good investment.

  22. HIB says:

    Well, as a good rule of thumb, if everyone else is getting into something, I would not. If it’s such a great deal, they wouldn’t need to advertise, they would have “raving fans” that would’ve told you about it.
    Thanks!
    -HIB

  23. Daniel Peterson says:

    This article completely ignores the real reason you should be buying gold and other precious metals in today’s economy. The next crisis we face is a crisis of the American dollar. Our real problem is a dollar “bubble”, and it’s about to pop. The government is doing all of the wrong things to get us out of this, i.e., creating more money out of thin air. You should buy gold, and lots of it. Not because the intrinsic value will “increase” because of supply and demand, but because the value of the dollar will decrease. (also because of supply and demand)

  24. Chris says:

    I agree with you. There has been a rush of gold sellers in the market these days. How much is just salesmanship I don’t know, it does somehow feel dodgy. Diversify your assets (inc gold, housing, cash) and spend time and money on what is most important, friends and family.

  25. Jennifer says:

    I have been watching this lately. I have contemplated selling some random pieces that really don’t mean anything to me and I never wear. but then I remember what my grandmother did for me and my sister when I was in high school. She took all her old jewelry and we spent an afternoon at a jewelers. She melted down her old jewelry and we each designed rings for ourselves. I still have it and it means so much to me. I think i will hang on to my old gold and do that for either my daughters or my granddaughters.

  26. surge152 says:

    Thanks for the article. I completely agree. My concern is that historically gold has just barely kept pace with inflation, so if you put large chunks of your nest egg into gold, you’re likely to come out flat on an inflation-adjusted basis. As far as hoarding goes, for all the money that gets invested in gold during periods of economic weakness by sophisticated investors, you have a countering effect of masses of people that need the money and sell their gold to take advantage of the high prices. Lastly, if one were thinking about investing in gold, you could have bought it at around $600/oz. just three years ago, and at around $500/oz. just five years ago. I don’t know that buying near the high is a good strategy.

  27. Borealis says:

    This is a no brainer.

    If they are advertising on the radio, they want to sell, thus they don’t believe the price is going to rise.

  28. Fred says:

    When US10yTBonds pay a staggering 2.3%, this is a “return free risk” as Jim Grant would say…
    In today’s environment, quickly shifting from just in time to just in case, owning free and clear unencumbered gold is an attractive proposition; maybe not as an investment, but definitely as insurance.

    So the question not addressed by Trent, is not so much WHY to own gold, but HOW TO purchase it… and radio ads may not be a good option.

  29. Oskar says:

    Isn’t this tru of most of the things we trade, e.g. with shares you have big long term owners who ‘hoard’ the company shares and hold them for long periods of time (normally 70-90% of the shares) the other 10-30% trade on the stock market, therefore we see large swings in price, however the real price of a company is dependent of what the main longterm owners are willing to sell for…which i think fluctuates less over time than the stock market…

    Thanks for another good post!

  30. Lisa says:

    Hi! I usually find I can agree about something you wrote, but no matter what articles you are reading or hearing: the economy isn’t getting better & unemployment isn’t down .
    http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=102×3676338 80,000 a day applying for unemployment Ohio

    Macy’s is closing 11 stores & laying off 1,000 people. http://consumerist.com/5126243/macys-closing-11-stores

    Walgreen’s- http://www.upi.com/Business_News/2009/01/09/Walgreen_to_lay_off_1000/UPI-36951231525629/ laying off 1,0000

    Unites States Postal Service–http://balleralert.ning.com/forum/topics/post-office-to-lay-off-40000

    Locally here- The truck stop has shut down.The second one is talking about it. Factories are shutting all around us. Dominoe’s Pizza has a person stand outside in the cold with a sign to sell pizzas for $5.
    The cities around us are going bankrupt.They don’t have money for school busing.The kindergardeners walk , if they live less than 2 miles from the school.Then having to walk past bunches of registered sex offenders homes , because sex offenders have to live farther from the school.It kind of defeats the purpose .This is walking on a major throughfare or in thr ditch, as there are no sidewalks. We have NEW school buildings, but NO BOOKS or chairs in some rooms. Day laborers can’t get work because there isn’t any. I had a job caring for an elderly lady , but she died last month. I went to apply for another home health aide job. The lady told me I could fill the application out , but she already has a stack of them in back & no jobs to fill. THe hospital in Columbus ,ohio is laying off people.I know people who have been laid off 3 times in last year from different factories.I don’t believe that the economy is ever going to get better. I really believe that we will see the downfall of the US. Locally here, there have been these places shut since last year:Goody’s, Steve& Barry’s, Office Depot and others.

    Here are lay offs from this area:Longaberger Basket factory-784 & more since August,
    Chrysler-Delaware plant -825 with another 100 in newark ,oHio.There are more too.
    AS you can see I could write all day & never make it through the list of places that have either laid off or permanently shut down.PLease keep money at home with you to ber able too make it when things start rolling along even faster.I believe that God’s judgement is coming to America. I don’t believe that gold or money will do much good after next couple years. We have 4 1/2 pages of home foreclosures in this county every week for last 1 1/2 years & it’s not slowing down. The Columbus Dispatch Newspaper had it’s entire section E , nothing but deliquient property taxes about a month ago, a whole 22 single space small letters type pages.Are things that much better where you live? Maybe you could try to find an area of the country that has jobs & is doing well to post about. I’m sure lots of readers would be interested in getting some idea of where to look for work. Blessings, lisa

  31. Itay says:

    Gold is always an “investor”‘s solid rock to hide under in times of financial turmoil, and was often considered a way to combat inflation. It’s value isn’t steadliy high just because of the hoarding phenomenon (that’s really over simplfiying it), but because it is a precious metal that has certain unique properties, with rare occurance on earth terrain.

    I’ve read a book a few monthes ago that recommended several asset allocation strategies, for different types of investor. The author referred to gold as the sort of investment that should be considered in case “hell breaks loose”, but never should any person hold more than 2-3% of his/her networth in such a commodity. This actually makes sense, because unlike bonds and stocks – gold can get stolen, and is expensive to insure (roughly 0.5-5% of amount insured is paid annually. That’s alot for insurance.)

    Last note – if you decide to invest in gold for hard times a small amount of your net worth, you could buy it in the form of official gold coins, mainly the Kruggerand, the English Soverign and the American Gold Dollar.

    Just don’t be a gold nut.

  32. Josiah says:

    only one word is needed here “inflation”

  33. To Young To Know says:

    Over Christmas, my mom was visiting from Florida. For some reason, the current gold drive came up in conversation. She told me that the last time she remembers such an effort to buy gold – it was caused by our govenment buying back hostages… Anyone able to give this any credit? She says I’m too young to remember (31).

  34. You’re right, gold isn’t the end all (…), I think gold makes people think that just because they buy it they won’t have to come up with a new recession proof business plan.

  35. I like the ones that tell you to sell your gold instead of the ads that want you to buy it. My favorite is the cheesy guy with the glasses offering a “safe, reliable transaction with satisfaction guraunteed!” Then they quote the customers and there’s the woman that says, “I sent in my engagement ring from my first marriage!” It’s so sad that so many people can relate to that.

  36. Goal Hunter says:

    I don’t really understand the economics of gold even though you’ve told me above. I get the part about supply and demand, but I don’t know why people would buy gold in particular instead of any other scarce commodity, especially if they weren’t going to do anything with it except store it. And then who buys it later? Someone else who wants to store it? Eventually it has to get to someone who wants to do something with it like wear it or make a microship out of it or whatever, no?

  37. KoryO says:

    I’m just happy that all the people who got left holding the bag back in the late 70’s during the last gold panic are finally getting their money back now.

    Oops. Funny how these gold advertisements never mention *that* wonderful return on investment.

    Don’t think it can’t happen again, guys. Problem is….I don’t know if I’m gonna be around another 30+/- years to see if I’ll get my “investment” back. And while someone mentioned diamonds, I can’t help but recall from my Russian history class that all they did for the Romanovs was deflect a few of the bullets in that basement in Ekaterinburg. They didn’t really help Jewish refugees fleeing from Hitler much, either.

    In the meantime, I think I’ll invest in a few beer cans to wash down my chill pills. If you panic, you usually make a REALLY STUPID decision.

  38. The Debt Guy says:

    I listen to talk radio and I heard 3 separate commercials for gold. It’s getting pretty annoying between radio and TV.

  39. Carlos says:

    Gold is a horrible investment. The bid/ask spreads are pretty high, and, historically, gold *has not kept pace with inflation*. That’s right, owning gold has *cost* you money vs. having those same funds in many other vehicles – including bonds.

  40. kz says:

    I am completely behind your statement here, Trent, BUT…please spend the time to read the articles to which you link to make sure they actually support your argument. For example, the article you linked from Reuters regarding the decline in umemployment claims contains the following:

    “A Labor Department official said the timing of the year-end holidays and volatility in factors used to seasonal adjust the data was likely to blame for the large decline in initial weekly claims…the fact many staff at claims offices were likely away for the Christmas vacation may have depressed the number of applications for aid that were actually processed.” To me, that’s hardly a good sign we’re at the bottom.

    It may be a small quibble, but it affects the quality of the work, in my opinion.

  41. Jen says:

    National Geographic has a fascinating article about gold in this month’s issue–almost as devastating as their piece about diamonds several years back.

  42. Iowa winters…that can do you in!!

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