Gold has been characterized as sureTO coverage against inflation/social unrest/instability, or, more simply, just a goods. But it is treated most of the time, by most people, as a investment.

This is true even for those who have a more negative attitude towards gold. “Stocks are a better investment.” In most cases, the logic used and the performance results justify the claim. But the premise is wrong. Gold is not an investment.

When gold is looked at as an investment, it is compared to all kinds of other investments. And then the technicians start looking for correlations. Some say that an ‘investment’ in gold is inversely correlated with stocks. But there have been periods of time where both stocks and gold went up or down simultaneously.

One of the commonly expressed “negative” characteristics of gold is that it does not pay dividends. Financial advisers and investors often cite this as a reason not to own gold. But then…

Growth stocks do not pay dividends. When was the last time your broker advised you to stay away from any stock because it didn’t pay dividends? A dividend is NOT extra income. It is a split settlement and payment of a portion of the value of your shares based on the specific price at that time. Your stock price is then adjusted downward by the exact amount of your dividend. If you need income, you can sell some of your gold periodically or your shares. In either case, the procedure is called ‘systematic withdrawals’.

The (i)logic continues… “Since gold pays no interest or dividends, it struggles to compete with other investments that do.” In essence, higher interest rates lead to lower gold prices. Conversely, lower interest rates are correlated with higher gold prices.

The above statement, or some variation of it, appears (almost) daily in the financial press. This includes respected publications like the Wall Street Journal. Since the US elections last November, it has appeared in one context or another on multiple occasions.

The statement, and any variation of it that implies a correlation between gold and interest rates, is false. There is no correlation (inverse or not) between gold and interest rates.

We know that if interest rates are going up, then bond prices are going down. So another way of saying that gold will suffer as interest rates rise is that as bond prices go down, so will gold. In other words, gold and bond prices are positively correlated; gold and interest rates are inversely correlated.

Except that throughout the 1970s, when interest rates were rising rapidly and bond prices were falling, gold went from $42 an ounce to $850 an ounce in 1980. This is exactly the opposite of what we might expect according to with the correlation theory cited above and often written about by those who are supposed to know.

During 2000-11, gold rose from $260 an ounce to a high of $1900 an ounce, while interest rates declined from historically low levels to even lower levels.

Two separate decades of considerably higher gold prices contradicting each other when viewed according to interest rate correlation theory.

And the conflicts continue when we look at what happened after gold peaked in each case. Interest rates continued to rise for several years after gold peaked in 1980. And interest rates have continued to decline over the long term, even going past negative whole numbers recently, six years after the gold will peak in 2011.

People also talk about gold the same way they talk about stocks and other investments… “Are you bullish or bearish?” “Gold will explode higher if/when…” “Gold crashed today like…” “If things are so bad, why isn’t gold reacting?” “Gold is stalling for time, consolidating its recent gains…” “We are fully invested in gold.”

When gold is characterized as an investment, the wrong assumption leads to unexpected results, regardless of logic. If the basic premise is wrong, even the best technically perfect logic will not lead to consistent results.

And, invariably, the expectations (unrealistic as they may be) associated with gold, as with everything else today, are incessantly short-term. “Don’t confuse me with the facts, man. Just tell me when I can double my money.”

People want to own things because they expect/want the price of those things to go up. That’s reasonable. But the higher stock prices we expect, or have seen in the past, represent valuations of greater quantities of goods and services and productive contributions to overall quality of life. And that takes time.

Time is of the essence for most of us. And it seems to dwarf everything else to an increasing degree. We don’t take the time to understand the fundamental basics. Just get to the point.

Time is so important in understanding gold. In addition to understanding the basics of gold, we need to know how time affects gold. More specifically, and to be technically correct, we need to understand what has happened to the US dollar over time (the last hundred years).

Many things have been used as money during five thousand years of recorded history. Only one has stood the test of time: GOLD. And its role as money was brought about by its practical and convenient use over time.

Gold is original money. Paper currencies are substitutes for real money. The US dollar has lost 98 percent of its value (purchasing power) over the last century. That decline in value coincides in time with the existence of the US Federal Reserve Bank (established in 1913) and is a direct result of Federal Reserve policy.

The price of gold in US dollars is a direct reflection of the deterioration of the US dollar. Nothing else. Nothing less.

Gold is stable. is constant AND is real money. Since gold is priced in US dollars, and since the US dollar is in a perpetual state of decline, the US dollar price of gold will continue to rise over time.

There are ongoing subjective and changing valuations of the US dollar from time to time and these changing valuations show up in the constantly fluctuating value of gold in US dollars. But in the end, what really matters is what you can buy with your dollars, which, over time, is less and less. What you can buy with an ounce of gold is holding steady, or better.

When gold is characterized as an investment, people buy it (‘invest’ it) with the expectation that it will ‘do something’. But they are likely to be disappointed.

In the late 1990s, there was much speculation about the potential effects on gold of the impending Gulf War. There were some price surges and anxiety mounted as the deadline for ‘action’ approached. Almost simultaneously with the start of shelling by US forces, gold pulled back sharply, relinquishing its previously accumulated price gains and actually moving lower.

Most observers describe this turn as something of a surprise. They attribute this to the quick and decisive action of our forces and the results achieved. That’s a convenient explanation but not necessarily an accurate one.

What mattered most for gold was the impact of the war on the value of the US dollar. Even prolonged participation would not necessarily have undermined the relative strength of the US dollar.

The value of gold is not determined by world events, political turmoil, or industrial demand. The only thing you need to know to understand and appreciate gold for what it is is to know and understand what is happening with the US dollar.