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.