Why Your Gold Is Worth(less) - Just Google It

Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

I recently penned a column about what I perceive to be a bubble in the price of gold, and was lambasted (100 times over) by the goldbugs, who shouted so high and loud I went deaf, leaving “gold is the only Real Wealth” as the last syllables that will ever ring in my ears.

Is what they say true? And what then constitutes “real wealth?” Is it having large stacks of green paper with deceased U.S. notables on them? Is it having bars and bars of gold stacked in your basement, a ton of wheat from which you can make flour and baked goods, or a lot of zeroes on your bank statement?

Currency is supposed to be a representation of value, a fluid way to exchange goods and services, long ago replacing the barter system, which inherently contains more friction, and thus inefficiencies. We all know what we’re willing to exchange for a dollar today, both in our time and energy expended in earning one, and in return, the goods and services it will enable us to buy.

Now, with government debt, and central banks rapidly printing money -- an effort to relieve irresponsible politicians of their mindless, and often corrupt, budgetary allocations of resources -- gold bugs today argue that the metal will rise dramatically higher as it is the only "true" protection against inflation.

My argument in my column was that gold has outpaced the Consumer Price Index, and that the current price of the metal is out of alignment compared to the basket of goods that an ounce of it could purchase during periods when the price of gold was relatively stable. By the logic of my argument, we would have to see a doubling of the CPI (a total of 100% inflation) for the current price of gold to be on par with values it held in past years.

Gold bugs counter that the money supply has grown faster than the CPI, yaddah yaddah yaddah ... And you know what, they’re absolutely right. So the question becomes, why have prices of other goods and commodities not risen in direct proportion to the amount of money being printed?

And here, we begin to begin to talk about the creation of “real wealth.”

The wealthiest individual in the world in the year 1600 was, let’s say, the King of France or the Sultan of Turkey. They had gold stacked to the roof, but no matter how much gold they owned, it would still take them ten days each to travel to the beaches of Italy, whereas the average American today can travel to Rome from across the ocean in ten hours. How much of their gold would the kings of yesteryear be willing to exchange for that?

Did the Wright Brothers create real wealth and value with the invention of the airplane? How about Boeing and Air Bus, who every year make this invention a little more efficient, safer, and cheaper, allowing the masses of the world to see far away places that only a select few people from centuries ago could claim to have spent their whole lives travelling to? Real wealth? Definitely.

How about milk and eggs, commodities used daily by much of the world, the demand for which have only increased as populations have risen, yet their prices have increased far more slowly than the money supply. Why? Competition, new technologies, and efficiencies have allowed for increased production and distribution.

How about my favorite company, Google. I mean, Google, the Internet, and Wikipedia, with their organization of information, have had such a radical effect on the world that the sole remaining purpose of a public library is to give hobos a free restroom to use. ** Sound of librarians slamming their non-electronic books down; whatever those are.**

Look, librarians, I’m jesting. Of course I know the hobos are allowed to nap as well.

Do you know how much more efficient Google and the Internet has made the world, how easily know-how and knowledge today can be spread and gleaned? What used to take the resources of cutting down a tree, printing words on paper, delivering it, heading to the library, locating the appropriate book (the non-electronic kind, whatever those are) can be done in a matter of minutes on your laptop.

Everyone benefits. That frees up time that people can spend elsewhere, increases efficiency at work, makes society more productive; now that is REAL WEALTH.

And there are a ton of other examples of this: Caterpillar’s cranes replace the Egyptian slaves of yesteryear (even if we still couldn't build the pyramids), Ford’s assembly line, the iPhone, hell, toss in the invention of fire and the wheel.

And as long as innovators, dreamers, and inventors are willing use their genius, their know-how, and intuition, and work together to create new products and technologies, the world will continue to grow more wealthy; Real Wealth will continue to be created. And if currencies are what the true leaders of capitalism are willing to accept in exchange for their contributions, then gold will never shoot the moon without some massive catastrophe taking place.

Betting on gold is a bet on stagnation of the human mind and progress. Gold is a currency when there is faith in nothing. And maybe politicians are on their way to granting your wish, but people like Larry Page and the late Steve Jobs will be forever holding back the rise in the tide of gold you dream of, goldie bugs.

<table> <tbody> <tr> <td>Gold Miners of Note</td> <td>Ticker</td> <td>P/E</td> <td>Yield</td> <td>Note</td> </tr> <tr> <td>American Barricks </td> <td>ABX</td> <td>11.4</td> <td>1.20%</td> <td> </td> </tr> <tr> <td>Freeport McMoRan</td> <td>FCX</td> <td>9</td> <td>2.20%</td> <td>also a big copper producer</td> </tr> <tr> <td>Newmont Mining</td> <td>NEM</td> <td>13.4</td> <td>2.30%</td> <td> </td> </tr> <tr> <td>Goldcorp</td> <td>GG</td> <td>23.09</td> <td>1.20%</td> <td> </td> </tr> </tbody> </table>

The list above are the purveyors and surveyors of gold, companies that are profiting from digging more of the metal out of the ground. My advice would be to bet not on them, but on companies that add value, invest in companies that might change the world, whether that be in material sciences, renewable energy, or software companies like Apple or Google, who re-invest their profits in far-flung projects that one day might bring us things like driver-less cars.

So go ahead all you gold bugs, keep screaming that gold has nowhere to go but up. Go ahead and keep rooting for wars, for America to go bankrupt, keep wishing Dick Cheney would get re-elected president, and keep praying solar energy will never replace oil. Scream as loud as you want, blare it from speakers, directly into my ear if you feel like it. It’s OK, I can't hear you anyways, nor can those feverishly dreaming up the products of tomorrow.

---- Please feel free to visit my blog at Rich Makes You Rich for more. ----


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