Thursday, August 14, 2008

Gold And The Price Of Keywords

I've been following and investing in gold, silver and palladium since 2006 (thanks to my wise older brother); for those of you who haven't followed the precious metals market, we've seen a strong bull run since late 2005 that has seen the price of gold go from $450 to nearly $1000/ounce.

If you regularly buy physical gold and silver as I do, you are probably scratching your head over the last 30 days because while the spot price for gold - meaning, the price you see when you check prices on global metals websites - has plummeted from $985 to $808, the 2000 or so physical dealers of gold nationwide literally cannot get their hands on gold. Gold dealers we know are offering to buy gold at as high as $850/oz despite the fact that global markets are listing gold at $808/oz.

Yes, you heard me right. While the exchanges through which govt-controlled gold gets traded is saying gold is $808, at the local shops where gold is bought and sold by individuals you can't even buy gold at $850.

What this likely means is that U.S. & European central banks are working in concert to artificially prop up the dollar by shorting gold on the major gold exchanges in London and Zurich. This is possible a) because the gold market is tiny compared to global equities and currency markets; and b) because gold is somewhat less fungible a store of wealth and it therefore takes time for changes in its value to be felt by individual investors. This is the prevailing thesis right now among knowledgeable gold watchers.

As I listened to my brother walk me through what's going on, it made me think that the gold market and the keyword markets are eerily similar. Central banks - which have an effective monopoly on paper money which is the primary store of wealth - are printing more money to finance everything from wars to social welfare and farm subsidies, and are using their monopoly to prevent owners of wealth from understanding the inflationary effect of the ~15% annual increases in money supply that they've been printing.

In search, you have Google and Yahoo controlling the market of buying intent ('wealth' to advertisers) and printing their own new, free [to them] money in the form of broader & by default matching options and unilateral account 'optimizations', but unable to control the one true source of 'wealth' in search = buying intent. Moreover, you have Quality Score and associated minimum bids, one of whose effects are to artificially inflate the value of traffic, while doing nothing to change real wealth - buying intent.

What's going to happen in the gold markets is anyone's guess, but if 5,000+ years of gold as the one true, immutable currency has taught us anything, it's that market intervention can only ever have temporary effects because global gold supply is fixed and only ~1.5% additional gold is extracted from the earth each year. Hence, you can expect this temporary market manipulated by Western central govts to fail over anything other than a short-term [election-term?] horizon.

Hmmm, maybe that's not entirely true, though? If consumers search their buying power weakened through inflation, perhaps they'll work harder to make ends meet, and to some extent increase productivity. And/Or, they'll spend less and save more.

Likewise in search, artificial manipulation by search engines to inflate the value of their users' buying intent can only work as long as advertisers are able to compensate for higher cost per unit of buying intent by increasing conversion rates. This undoubtedly means multivariate testing and behavioral targeting solutions like Omniture's Test & Target will have a steady stream of buyers for years to come. Also, advertisers will be forced by this market manipulation to capture buying intent more directly through effective multichannel analysis and attribution modeling so that they can better understand the intent they're already paying for and keep the users behind it much closer to them after the first sale. Lastly and most importantly in the short-term, this means every ppc advertiser spending what to them are significant sums of money must instrument their SEM campaigns with a platform that can give them that multichannel visibility, inform and tie into conversion optimization systems and manage buying intent from search to their own benefit and not that of the search engines.


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