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Don Coxe Dissects Gold, As "The Oldest-Established Store Of Value Moves To Center Stage"

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From Don Coxe of BMO, Basic Points - Summer's Storms and Norms

The Oldest-Established Store of Value Moves to Center Stage

Who needs gold?

Over the decade that we have been advocating exposure to gold and gold mining stocks, we have been routinely subjected to basic skepticism: why gold? Isn’t it irrelevant?

If the dollar doesn’t look good, I can buy the yen.

If the yen looks bad, I can buy the euro.

Besides, what good is gold? Other commodities are useful and, in most cases, absolutely necessary.

But gold hasn’t been needed for central banking for nearly a century, and, apart from jewelry or for providing Mafiosi with a convenient vehicle for storing their wealth, it doesn’t fulfill any purpose that sound paper money can’t do better. (This, of course, assumes the availability of sound paper money.)

In answering a question about gold’s rather dramatic return to store of value status with the portfolio managers of one of Canada’s largest public sector pension plans, we took a new tack:

“The longest-established text-based religion in the West is about the God of Jacob—His works and His worship. For roughly five thousand years, a believer summed up his credo by saying, ‘I believe in God.’

“But when this credo arrived, it had to share space with an alternative belief system that was around for thousands of years before the Judaeo-Christian era began. A believer in this system summed it up, ‘I believe in Gold.’”

Two systems—similar professions of faith. Neither could prove to a skeptical rationalist why its tenet was valid.

As we have thought about this space-sharing and competition between spiritual and temporal beliefs, we have mused that large-scale skepticism about both of them occurred only recently. Darwinism, paleontology, and astrophysics combined to drive the Old Testament explanation of history out of the temples of scientific learning. Keynesianism came along to drive gold from the temples of the central bank money-changers in favor of the printed paper promises of politicians.

Why is gold back among serious, respectable investors?

Why is it now available through ATMs in the gold market of Abu Dhabi?

Is it a return of inflation?

How could that be, when, as the wise David Rosenberg routinely scoffs, “What inflation?”

Indeed, Canada reported its first negative CPI in 44 years, the US, its biggest decline in 18 months, and across the OECD there is, (at least for now), more fear of deflation than inflation. Despite astonishingly high housing subsidies that are swelling the already-bloated US national debt, US home prices remain soft, and foreclosure is not only no longer a disgrace—it threatens to become almost chic. (A recent poll of homeowners disclosed that 55% of those with mortgaged homes believed their house was worth less than their mortgage.) Not all the news is bad: The cost of TARP has turned out to be far less than feared: the cost of saving the US from house price collapses on a scale that would unleash a Depression—including the mind-boggling costs for keeping
Fannie, Freddie and the Federal Home Loan Bank alive and lending, and the various cash subsidies to buyers—is many orders of magnitude above the Wall Street bailouts.

If the only thing keeping house prices from collapse is a boost in the national debt bigger than the total cost of all the US’s foreign wars since World War II, then how can inflation be a threat?

Yes, some industrial and food commodity prices have shown some inflationary tendencies, but, with the exception of coffee, cocoa, iron ore and metallurgical coal, prices have been sagging recently—although remaining far above Lehman lows.

Interest rates remain in the zero range, which would be a sure sign of inflation on the horizon if there were projected increases for anything significant other than wages and benefits for government employees.

Although the Fed’s response to the Crash was the greatest goosing of its asset base in history, raising fears among the putatively paranoid that a new Weimar was being born, in recent months the Fed seems dedicated to proving that its previous promises of piety were sincere. Based solely on the numbers, Bernanke almost seems to be willing to risk outright deflation:

So what makes gold so attractive now?

And who is buying it?

According to the World Gold Council, industrial and jewelry demand have come back sharply (after collapsing in 2009), but the big new buying is for bar hoarding. Banks are running out of vault space and are building new above-ground facilities. (At the bottom of Gold’s Triple Waterfall Crash, banks were moaning that their vaults were nearly empty and were costly to maintain.) In last year’s First Quarter, there was net selling of 28.1 tonnes in bars. This year investors bought 89.7 tonnes. Record amounts of coins are being minted.

China and Russia have bought some gold for their foreign exchange reserves, but these purchases have been mostly from their own nations’ mines.

The SPDR Gold ETF’s holdings keep setting records. If it were a central bank, its hoard would put it in the top four.

We think that future historians may well report that the moment when gold once again became a store of value was when the dollar began soaring in response to the stench of seared Greece—and gold climbed right along with it. The asset classes that have been inversely correlated since Keynes’s time suddenly united.

When we first noticed this, we headlined it in a Conference Call, which we titled “The Odd Couple.”

That gold and the dollar are fundamentally inversely correlated to each other is obvious. One bets on gold because one is deeply skeptical that governments will fulfill their promises.

So why are they both in a mini-bull market?

We believe this is driven by the squeeze on the European banking system from the drachmadrama:

This forces the weaker banks to borrow in Eurodollars, thereby driving up the value of the greenback. International corporations also collectively rush to adjust their exposures, switching cash holdings from euros into dollars.

Paper Prophets?

Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.”

He won the Nobel Prize in Economics in 1976 for his work documenting that dictum. It helped to explain stagflation—rising inflation during recessions.

The Keynesians who dominated global economic thinking after WWII believed inflation was caused when wage increases outstripped productivity gains on a sustained basis. President Kennedy’s famed confrontation with the steel industry came when he convinced the Steelworkers to agree to a modest pay boost at a time of rising inflationary pressures. When Big Steel then boosted its prices above the percentage increase in wages, Kennedy declared war on Steel and the industry capitulated.

In the 1970s, a new collective bargaining pattern emerged, as the big unions successfully negotiated COLA clauses in all their contracts—wage boosts plus cost-of-living increases tied to CPI. As inflation surged, the companies and their unions were widely blamed for causing price increases across the economy even as unemployment was rising and most of the OECD was struggling with recessions.

When Margaret Thatcher became Britain’s Prime Minister in 1979, she dedicated herself to imposing monetarism on Britain as the way to control inflationary wage demands from the big British unions.

As she told me in a private meeting in Toronto in 1978, she had had a meeting with Germany’s Chancellor Helmut Schmidt shortly after becoming Tory leader.

She asked him, “Why don’t your German unions make inflationary wage demands like our British unions?”

He replied, “Each year, we have a meeting with the eight German unions.”

In explaining her surprise at this statement, she pointed out to us that there were 36 unions at the Ford Dagenham plant alone.
“What happens when you meet with the eight unions?”

“They tell us what their wage requests will be and we tell them what the economy can afford.”

“And what if the unions demand more than you believe the economy can afford?”

“Then, madam, I tell them that the Bundesbank will not print the money to ratify those demands.”

As she recounted this event, she said, with rising emotion, “Imagine that!  He’s a Socialist and he understands monetarism. I'll bring monetarism to Britain to smash the power of the unions! The coal miners will go out on strike and we’ll just leave them there. Within two or three years, inflation will start to collapse, along with interest rates, and Britain will be on its way back
to being an industrial power.”

She went on, “In 1980, Ronald Reagan will win the Republican nomination and he will defeat President Carter and he will use monetarism to end the inflation era in America.”

What actually happened was that President Carter was forced, because of soaring inflation, to install Paul Volcker as Fed Chairman and he introduced monetarism. He kept raising rates after Reagan was elected, but despite screams from the business community that his tight money was killing the economy, Reagan backed him. The deep recession in 1981-82 with sky-high interest rates arising from strict adherence to monetarism nearly aborted the Reagan recovery.

The most important economic number for portfolio managers in 1980–1984 was the weekly Fed statement showing conditions in the Monetary Base, M-1 and M-2.

We used those numbers to trade bonds, which became our asset class of choice when we dumped commodity stocks once we saw that Reagan would be elected. We moved our portfolio into very long Treasury zero-coupon issues when it looked as if money supply was being brought under control and the Fed could begin to ease.

That was then.

So why didn’t inflation come roaring back when Bernanke doubled the Monetary Base and M-2 was climbing at double-digit rates?

And why didn’t inflation come back when central banks across the OECD were growing their monetary bases and money supplies were climbing? And why did gold take off to record levels when money supply growth began to dwindle and actually turn negative?

We believe that Gold’s recent rise began when investors sought a classic inflation hedge, but its real run came when deflation risks were far more obvious than any evidence of inflation.

As we have written in these pages, gold is the classic store of value. It should retain its value under both inflationary and  deflationary conditions.

That means a great time to buy gold to make capital gains is when inflation is rising.

It also means a great time to buy gold to conserve existing wealth is when (1) prospective risk-adjusted returns on bonds and stocks look unattractive because the economic outlook is for slow growth with (2) a risk of a renewed downturn that would hammer the value of stocks—particularly financial stocks—and real estate anew, and (3) bond yields are too low given the endogenous risks in the currencies in which they are issued and (4) the range of future fiscal deficit forecasts is from grim to ghastly.

What we believe is unfolding is a rush into gold by individual investors who look at the astronomic growth in financial derivatives—particularly collateralized debt swaps—and government deficits at a time when the effects of demographic collapse are finally being understood. According to some guesstimates we have heard, the supply of outstanding financial derivatives may be in the $70 trillion range, dwarfing the combined value of money supplies and debts. The total value of gold is so minuscule in comparison to the supply of these software-spawned instruments that it cannot be any real help in stabilizing global finances—but it can be a haven for investors seeking to protect themselves against an implosion of majestic proportions.

That is why gold and the dollar can—if only for a brief time—rise together, as investors see that the only major currency  alternatives to the dollar—the yen and the euro—are backed by rising national debts, rising numbers of pensioners, falling working-age populations, falling real estate prices, and a falling OECD share of global GDP.

There is no constraint on the ability—or, apparently the willingness—of governments and central banks to create new financial liabilities which can only be serviced if GDP growth rises—on a sustained basis—to higher levels than most OECD nations have seen since the Baby and Reagan-era booms.

Given the average fertility rates across the OECD of 1.3 to 1.5 babies per female, return to the economic growth rates of those eras is really out of the question. Each new generation is roughly two-thirds the size of its predecessor, so construction of new homes, schools, and commercial buildings and filling them with workers—an important component of past periods of rapid GDP growth—has to be at lower rates in each cycle. The alternative—to pretend that the number of first-time homebuyers will reach or exceed the numbers in earlier cycles and, with government stimulus, build them on grand scale in the hope that they will come—can lead only to financial disaster.

In the current financial environment in which risk measures such as the TED Spread and VIX are leaping back toward post-Crash peaks, a momentous shift in investor appraisal of endogenous risks within asset classes is unfolding: sovereign credits are no longer being automatically accorded low-risk appraisals, and banks are being downgraded on the basis of their high exposures to sovereign credits—not, as in previous financial downturns, to dodgy corporate debts or putrid mortgage products.

This re-rating of debt instruments is a sign of the fundamental fragility in financial valuations since the end of those halcyon, bygone days when Moody’s was a homely, plain-Jane stock which lived modestly, mostly off municipal bonds. Its puritanically lofty  standards for Triple-A ratings could be met by only a handful of corporations and a select few governments and their agencies. Then Moody’s suddenly blossomed into a sexy growth stock fattened in all the right places by fabulous fees for analyzing collateralized mortgage instruments and giving them the Good House-Financing Triple-A Seal of Approval. Too late did we learn that Moody’s “experts” never really understood what the underwriters and math PhDs were confecting. Only the aggregators of the underlying mortgages knew about the deadbeat and dead mortgagors, and the systematic home overvaluations—and the only one of them who has been publicly pilloried is Paulson. (No, not that Paulson.)

The world has gone mad today
And good’s bad today,
And black’s white today
And day’s night today…

This week, Moody’s finally got around to lowering Greece’s bond rating to near-junk. They seem to be cleaning up their act—probably in response to some pressure from Warren Buffett.

So…as a store of value for future generations,

If you can no longer believe in residential real estate,
and you can no longer believe in bank deposits,
and you can no longer believe in the dollar,
and you can no longer believe in the yen,
and you can no longer believe in the euro…
What can you believe in?
How about gold?

It’s so old, it’s new again.

It can’t be synthesized.

It’s been despised by every liberal economist since Keynes.

Among the arguments routinely adduced against it is that it pays no interest—but with interest rates in the zero range, the opportunity cost is minimal.

Treasury bonds? Why bet your future on a ten-year piece of paper that pays 3.2% in a currency that’s been in a bear market for most of the time in recent decades, knowing that the new supplies of bonds will be endlessly growing, in good times and bad, because the issuer’s own forecasts say so (and most independent forecasters say the issuer’s numbers are absurdly optimistic)?
Stocks?

The S&P currently trades at its level of March 1998—when Gold was trading at $302.

Industrial and Agricultural Commodities?

To our sustained disbelief, major pension funds continue to hold more than $150 billion in passive commodity funds like the GSCI. This is the investment equivalent of Einstein’s dictum that one proof of insanity is trying the same experiment over and over, hoping for a different result. Because of the contangos—particularly oil—these vehicles are even worse strategies than putting all the funds into Las Vegas slots—because your odds are better with the one-armed bandits.

Gold is the recently-awakened Sleeping Beauty, who always was beautiful but was overlooked. She is ready to take the throne among stores of value that was long occupied by sovereign credits.

The handsomest courtier in her realm wears the crest of a long-necked water bird.

Conclusion

Until very recently, the case for gold was almost always presented as a hedge against inflation.

That case remains valid, because if the US and European economies revive, then the pressure on the Fed and ECB to raise rates will become intense, even though unemployment will still be at historically high levels and politicians will be screaming that any rate increases will punish the poor to reward the rich.

If the major central banks do not raise rates, investors worldwide will begin to bet heavily on a return of inflation.

However, those monetary Rubicons seem off in the distance, given modest US growth, and barely-perceptible recoveries or renewed downturns within the eurozone.

We believe gold should be a significant component in most high net worth wealth preservation programs, and in most endowment and pension funds.

For the first time since 1980, Germans and other Europeans with long memories are pouring into gold dealerships to exchange euros for coins and small gold bars. Germans have watched as twice in the past century their currency was utterly destroyed. They were strong-armed into believing Ludwig Erhard that their nation could have a currency that was as good as gold, and that revived faith was the underpinning of the German Miracle. That faith is now eroding, and individual savers are protecting themselves. Long-suppressed atavistic attitudes that suddenly coalesce into fear-driven behavior can have momentous  consequences.

Summing Up

Browning said it (In Rabbi Ben Ezra), “Leave the fire ashes. What survives is gold.”

 

Full June report by Don Coxe, a must read for everyone, can be found here.

 

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Sun, 06/20/2010 - 22:58 | 424377 DoChenRollingBearing
DoChenRollingBearing's picture

Anyone with wealth who does not have any gold should start buying gold & silver immediately.

Diversification and insurance all wrapped up into one nice package.  So simple.

Mon, 06/21/2010 - 04:47 | 424670 justbuygold
justbuygold's picture

I continue to buy as much of Central Fund's  Silver Bullion Trust   ( SBT.un on Toronto Stock exchange) as I can get my hands on.   Right now it is trading slightly below its NAV which is a steal compared to the normal 10% premium.

Sun, 06/20/2010 - 23:06 | 424391 nuinut
nuinut's picture

How Can We Possibly Calculate the Future Value of ... Gold?

Stocks to Flow ratio.

The fact gold has no utility is its utility.

Sun, 06/20/2010 - 23:12 | 424402 Gold...Bitches
Gold...Bitches's picture

actually, it has many utilities... just no economic ones at anywhere near the current price.  Thats another indication that its not anywhere near to being a commodity, like say copper, or nickel, or uranium.

Sun, 06/20/2010 - 23:46 | 424451 dnarby
dnarby's picture

So howcome you get to embed links in text and I don't? >: /

Mon, 06/21/2010 - 00:02 | 424473 nuinut
nuinut's picture

HTML. Use disable rich-text link below comment box.

Anyone can use it.

Mon, 06/21/2010 - 02:05 | 424599 thisandthat
thisandthat's picture

c&p

Sun, 06/20/2010 - 23:54 | 424463 sheeple
sheeple's picture

FOFOA always have interesting articles on gold

Sun, 06/20/2010 - 23:14 | 424407 M31Capital
M31Capital's picture

Thanks DoChen for the timely advice.  

Sun, 06/20/2010 - 23:52 | 424457 DoChenRollingBearing
DoChenRollingBearing's picture

M31, since my Sarcasm Detection Meter doesn't even work, I say:

Thank you for the kind words.

Even though worthies beyond me have been howling at the winds saying the same...

I completely agree with the highly esteemed Gordon_Gekko that time is short, buy physical gold now.

 

Sun, 06/20/2010 - 23:16 | 424410 QuantumCat
QuantumCat's picture

The masses are almost always wrong, and we would be wrong at looking at a snapshot of public reaction to debt crises.  The lessons they learn are generally applied at the wrong time.  Gold is making new highs, yes, but the momentum is waning at all degrees... from 1 min to monthly. I think we will see at least a multi-year correction during deflation and the average opinion on the matter, almost by definition, is sure to get it wrong. 

Sun, 06/20/2010 - 23:37 | 424438 Implicit simplicit
Implicit simplicit's picture

The masses are not buying gold. ZH population is an outlier to the general population.

Sun, 06/20/2010 - 23:56 | 424468 DoChenRollingBearing
DoChenRollingBearing's picture

Quantum, I quite agree with Implicit.

I only know two (2) people who have physical, non-jewelry gold.

I think that we are still in the early innings.  And if things go really bad ("TSHTF"), gold may be a life saver.

Mon, 06/21/2010 - 08:12 | 424745 goldfish1
goldfish1's picture

In your opinion, how great of an outlier?

Mon, 06/21/2010 - 11:08 | 424939 Blindweb
Blindweb's picture

An outlier in the financially educated space alone.  Then determine what percent of the population is financially educated. 

Mon, 06/21/2010 - 00:21 | 424494 technovelist
technovelist's picture

The masses are almost always wrong

Let us know when "the masses" have 10% of their assets in gold. Oh, they don't have any significant assets? Hmm, that is a quandary...

Not really, of course: those who don't have any significant assets don't have any significant effect on prices. However, those with significant assets also don't have any meaningful amount of gold; there isn't enough gold in the world for that... at these prices.

Mon, 06/21/2010 - 00:29 | 424513 Quinvarius
Quinvarius's picture

Is that the latest anti-gold idiocy?  Failing momentum?  That doesn't even make any sense.  Doesn't that imply that it is moving on something other than momentum?  Wouldn't that be a good thing?  Maybe you should try more critical analysis and less parroting someone else's discredited arguments from 2 months ago.

Mon, 06/21/2010 - 01:11 | 424558 QuantumCat
QuantumCat's picture

For example, RSI... market tops are generally built on waning momentum.  If you don't know I'm talking about, then you are making a great counter point to Implicit Simplicit's proposition.  Your position on Gold seems to be quite emotional... I challenge you to consider the implication's of that.

Mon, 06/21/2010 - 02:21 | 424611 JLee2027
JLee2027's picture

God told me to buy silver.  Was that based on emotion too?

Mon, 06/21/2010 - 06:07 | 424693 Anton LaVey
Anton LaVey's picture

No, if a chunk of metal "told you" to buy other chunks of metal, it means it's time to get your head examined...

Bada-Bing! Thank you, I'll be here all week! Do tip your waitress!

(Sorry, could not resist - and I agree with you, Gold and Silver are your best friends right now)

Mon, 06/21/2010 - 07:56 | 424724 FrankIvy
FrankIvy's picture

Anton, you're going to have to find another venue.  You wrote - "No, if a chunk of metal "told you" to buy other chunks of metal, it means it's time to get your head examined..."

 

Re-read his post.  He said GOD told him to buy silver.

 

Of course, maybe Gold is God.

Mon, 06/21/2010 - 08:13 | 424748 Anton LaVey
Anton LaVey's picture

Ah, yes, I knew I needed to clean up my glasses this morning...

On the other hand, if "GOD" told him to buy Silver, it is definitely time to get that gentleman's head examined.

Last thing I noticed is that Deities are not really big on investment advice for the punters.

Mon, 06/21/2010 - 12:52 | 425105 JLee2027
JLee2027's picture

Wrong!!  The Bible is filled with investment advice. Hundreds of passages.  The only real money is Gold and Silver, paper money is an abomination. God owns all the Gold and Silver, we are the authorized custodians. 

"The silver is mine and the gold is mine," declares the LORD Almighty (Haggai 2:8).

 

Deuteronomy 25:13-15 (ethical business dealings)

You shall not have in your bag differing weights, a large and a small. You shall not have in your house differing measures, a large and a small. You shall have a full and just weight; you shall have a full and just measure, that your days may be prolonged in the land which the LORD your God gives you.

Tue, 06/22/2010 - 07:15 | 426416 Anton LaVey
Anton LaVey's picture

Ah yes, indeed.

On the other hand, have you ever read the following?

Then he said to them, "Watch out! Be on your guard against all kinds of greed; a man's life does not consist in the abundance of his possessions. (Luke 12:15)

Or maybe this?

Command those who are rich in this present world not to be arrogant nor to put their hope in wealth, which is so uncertain, but to put their hope in God, who richly provides us with everything for our enjoyment. (1st Timothy 6:17)

I rest my case, your honor.

Mon, 06/21/2010 - 09:39 | 424837 Treeplanter
Treeplanter's picture

If we are seeing a market top, it is likely very temporary.  The central banks are trying to smack the metals down right now.  If they can, we get a buying dip.  The growing problems with supply are going to join up with increasing demand.  I'm the only one I know buying gold and silver.  Wait til Sarah Palin's facebook page discusses the advantages of having a stash of real money...  Money and emotion are old friends, we do get carried away.

Mon, 06/21/2010 - 01:12 | 424551 QuantumCat
QuantumCat's picture

Gentlemen,

Perhaps we are only in the first inning of this gold bull market, and only ZH and moneyed individuals are participating, but I think we are near the end of it.  This "inning" has lasted nearly ten years, and unless you are linearist, markets work in cycles.  Gold commercials currently dominate FOX "Buy your gold where I buy mine... Rosland Capital (G Gordon Liddy)", and quite a few non-financial market types have liquidated their assets in exchange for gold. Perhaps gold will go to $10,000, but timing is the bitch.  What was your stance on the dollar last year, out of curiosity?  Just asking...

Mon, 06/21/2010 - 01:42 | 424582 Apostate
Apostate's picture

I agree that there is an extremely remote possibility that gold will decline in price in dollar terms, but you're incorrect that all assets move in cycles.

Fiat currencies - like companies - often go to zero.

In fact, just about every company in history has gone to zero. Every fiat currency except the ones currently in circulation have also eventually gone to zero.

In gold terms, the megatrend in the dollar is overwhelmingly towards zero. 

Mon, 06/21/2010 - 02:12 | 424605 DoChenRollingBearing
DoChenRollingBearing's picture

Apostate, you too are a marvel to ZH!

Long may you write!

+ 10,000

Mon, 06/21/2010 - 02:28 | 424619 Apostate
Apostate's picture

It's an honor to write beside you.

Mon, 06/21/2010 - 02:16 | 424606 DoChenRollingBearing
DoChenRollingBearing's picture

Dupe post sorry

Mon, 06/21/2010 - 02:15 | 424609 DoChenRollingBearing
DoChenRollingBearing's picture

Dupe post sorry

Mon, 06/21/2010 - 02:48 | 424628 PhattyBuoy
PhattyBuoy's picture

..

Sun, 06/20/2010 - 23:16 | 424411 lawrence1
lawrence1's picture

Good article, and I would recommend reading fofoa to better understand gold and its place in the world and what may well happen. And I would welcome reading any critique of fofoa's viewpoint.

Sun, 06/20/2010 - 23:37 | 424434 nuinut
nuinut's picture

A discussion about that here: www.zerohedge.com/forum/freegold

Sun, 06/20/2010 - 23:40 | 424442 Ragnarok
Ragnarok's picture

Same.  I asked for critiques of fofoa'sviewpoint a while back as well, and what people disagreed with was what happens after the fiat collapse.  Will "Freegold" manifest itself or will gov't/bankers become aggressive?

Sun, 06/20/2010 - 23:56 | 424467 nuinut
nuinut's picture

There are no critiques that hold water. I've looked, and asked, and only ever found the same old tired BS that gets wheeled out by occasional commenters here, ie. "you can't eat it", "it has no utility", "my dog ate my homework", etc etc.

The only people I see debating it are the ones who don't understand it, whilst thinking they do.

The latest post, linked in my first comment above, should put the nail in the coffin.

FOFOA said:

With each pass-through of the dollar more "flow gold" is moved into "stock gold", not the other way around like commodities and paper.

That statement explains one hell of a lot, but the real problem with peoples understanding is this:

Another said:

Your past holds little of knowing value outside of currencies, this does block the good view!

Mon, 06/21/2010 - 00:23 | 424499 Shameful
Shameful's picture

FOFOA seems to think that our govs will encourage it's citizens to hold wealth in gold. Holding wealth in something like gold could be a great idea for the citizens but that removes the govs ability to loot savings via inflation.  Now it should be clear to anyone that the state particular in the US only exists to pillage the public.  This is the first goal of all governments, to provide for the care and well being of it's political elite and bureaucrats. Sure he might be right and the value may go to the moon, but I expect Uncle Sugar to eye it greedily. After all Uncle Sugar is willing to kick on capital, wage, and price controls as history shows. Does anyone think that the IMFS$ system will crash and Uncle Sugar will just kick back and say "You gold bugs got it right! I like you guys so I won't try to come after you"?

Now if FOFOA is right and we do see Freegold, then it seems to me that anyone with any significant gold holdings would be well served by hitting the bricks and fleeing the epic center of the IMFS$ collapse.  Now I don't expect confiscation but I do expect a mighty tax.  Uncle Sugar will demand his piece of the action, he always does.

I like reading FOFOA and hell he could be right, but Uncle Sugar is not letting a looting opportunity pass him by.  Particularly when it would be so easy to rally the populace for a gold tax to attack those evil "speculators"

Mon, 06/21/2010 - 02:04 | 424559 nuinut
nuinut's picture

Shameful, nice to see you back.

This comment: #12, in the ZH Freegold forum, addresses your point about Uncle Sugar wanting his cut. There is a lot more to say on that front, but that comment sums up my take on it.

I think Uncle Sugar, and the $IMFS, is coming under real pressure at this time.

 

Mon, 06/21/2010 - 07:19 | 424706 Übermensch
Übermensch's picture

That is correct. To few people in the US own gold for there to be an uprising for the draconian policies the government will start implementing against gold holders.

Sun, 06/20/2010 - 23:55 | 424466 sheeple
sheeple's picture

+1

'Reflection' is a great article [recent] from FOFOA

Mon, 06/21/2010 - 00:08 | 424483 DoChenRollingBearing
DoChenRollingBearing's picture

It is really hard to predict the future, so I go with what is cautious and makes sense to me.

FOFOA's writing is dense but has the ring of truth to me.

...

If FOFOA's prediction of $55,000 / oz (2009 non-hyperinflated $) comes true, I win the Lotto!

But, Chumbawamba, at 110% all-in-gold will win the POWERBALL and be the Alpha-Male around here.  Comely virgins will knock at his castle gates...

So if that comes to pass, go ask Chumba for a loan and not me!

Sun, 06/20/2010 - 23:24 | 424414 Gubbmint Cheese
Gubbmint Cheese's picture

Read Lewis' "The Big Short" over the weekend. Whether you liked the book or not, I (for one) loved Eisman's approach to traders when he'd ask, "so how are you going to f*ck me?". So as we process these bailouts and read about the steps the govt is taking to 'save the system' - I hope more people ask:

"okay, so let's say I help you save this system.. how are you going to f*ck me?"

edit: that's totally rhetorial btw.. ;p

 

Sun, 06/20/2010 - 23:29 | 424424 Implicit simplicit
Implicit simplicit's picture

Great book. Finished it a couple of weeks ago. A good story with a nice educational message regarding the crookedness of wall st..

Sun, 06/20/2010 - 23:33 | 424432 Implicit simplicit
Implicit simplicit's picture

Many people who don't like gold still believe that everything is going to be fine with the economy and the stock market. It's sad really.

Mon, 06/21/2010 - 02:52 | 424630 PhattyBuoy
PhattyBuoy's picture

... yep, and tragically, with their life savings trapped in a 401K.

Mon, 06/21/2010 - 07:49 | 424722 FrankIvy
FrankIvy's picture

Well this is it, really.

For most of the anti-gold folks out there, it's really just a question of not agreeing/seeing/believing that the end is nigh.  If I thought that we were "pulling out" of the "recession," for example, and I thought it would soon (read - within a few years) be BAU, then I'd certainly sell gold right now and take my 300% profit. 

It's like this - if they're right about their fundamental premise, then they're right about their fundamental conclusion.

Of course, IMO, their premise is wrong.  The end is nigh.

Sun, 06/20/2010 - 23:53 | 424460 sheeple
sheeple's picture

Whoa BEEM-MO is actually circulating a constructive article ... nice post ZH!

Mon, 06/21/2010 - 00:46 | 424528 Spitzer
Spitzer's picture

nothing wrong with BMO.

I have noticed more gold bugs saying that you can get rich by buying gold and gold stocks now, for a while they just said to have 20% or so as insurance.

I never liked the insurance dribble, fortunes will be made in gold over the next few years.

 

Mon, 06/21/2010 - 09:48 | 424846 Treeplanter
Treeplanter's picture

You nailed it, Spitzer.  I have everything I own in gold, silver, and the miners.  I see low risk combined with once in a lifetime gains.  Yesterday I sent my family an email discussing the coming short squeeze, that time is running out to get in at a decent price.  No interest, other than calling me Goldie.  Kids! whatsamattawitkidstoday...   

Mon, 06/21/2010 - 00:52 | 424538 strannick
strannick's picture

 

Dang that was good.

Zerohedge is like university, except

1.where you learn interesting usefull things

2.you dont have to bankrupt yourself for the rest of your life to pay for it.

3.you dont emerge a brainwashed ideological idiot after 4 years of listening to tenured, smug, lazy-minded oafs

Mon, 06/21/2010 - 02:05 | 424598 Dr. Sandi
Dr. Sandi's picture

Yeah, and I'm lying here drunk after a weekend of sex and debauchery.

I sure hope Mom and Dad don't find out what I'm REALLY doing here at ZH University.

Unfortunately, this ZH degree probably won't get me a job any better than the one from the state college.

 

Mon, 06/21/2010 - 02:27 | 424617 StychoKiller
StychoKiller's picture

When most Professors graduate, there's no work so they go back to school and eventually end up in teaching slots.  They become the Ivory tower personified.

Mon, 06/21/2010 - 08:37 | 424772 maff
maff's picture

What evidence do you have to support this? I can tell you that if you want to find the very best physicists, mathematicians etc you need to look no further than our elite Universities. The most talented students are killing themselves to get a job in academia, its the losers that have to go out into industry - they couldn't hack it at the top.

Mon, 06/21/2010 - 03:55 | 424647 TuesdayBen
TuesdayBen's picture

4. No basketball team.  Imagine the excitement were the 'Zeroes' to ascend the Final Four, gracing the court in their glittering, gold-on-gold uniforms...

Mon, 06/21/2010 - 11:01 | 424928 sheeple
sheeple's picture

+1

Mon, 06/21/2010 - 01:16 | 424563 Pooh-Bah
Pooh-Bah's picture

Is this graph in this article saying that the dollar is as good as gold?

Mon, 06/21/2010 - 01:16 | 424565 Arm
Arm's picture

Gold can only truly store value if it is monetized.  Until that happens, you must make your daily transactions in fiat currency.   If fiat currency deflates the price of gold in fiat units goes down.  This makes it a lousy investment.

The wealth preservation qualities of gold in deflation only pay off if the monetary system goes to hell. Literally governments must not be able to issue ANY fiat currency.  This is the same as saying that states collapse. 

Under any other scenario you lose purchasing power in a deflationary scenario.

If you believe this dire scenario, by all means take ALL your wealth into gold (or land).  If you don't then stay away from gold as it is in a bubble in fiat currency terms.

PS: To all the goldbugs that will immediately proceed to junk my post.  Please post a logical, coherent rebuttal of my arguments and not just talk trash.  Many thnx.    I am only posting this as a public service announcement to the hundreds of small investors who stand to lose much of their wealth based on very bad advice.

Mon, 06/21/2010 - 01:37 | 424580 strannick
strannick's picture

 

Your comment is only a 'public service anouncement to small investors' if you are right, and if you are not the one giving the bad advice.

As for your theory on how gold performs in a deflation, we just went through one, and gold outperformed everything else, as in everything else crashed worse than gold. Not USTreasuries of course, but that is only because 'sophisticated investors' showed they are indeed dumber than Jeff Micheals frozen to Jim Carey going through the Rockies on a scooter.

When you write ...

'Gold can only truly store value if it is monetized.  Until that happens, you must make your daily transactions in fiat currency' well, you are starting to sound like an economics professor.

Yeah, you'll be making your transactions in fiat currency. But 9 years ago you were transacting $250 paperbucks for an ounce, now you're transacting $1250 for an ounce.

Mon, 06/21/2010 - 02:22 | 424612 Arm
Arm's picture

I hope you are intellectually honest and recognize that the performance of gold is VERY much dependant on when you start measuring it and versus what asset. 

Gold has MASSIVELY underperformed the S&P on a 20 year basis.  It has outperfomed S&P since the collapse of the dot-com bubble.  It has underperfomed S&P since April 09.  What is it today? 66% gain S&P versus 25% for gold?

Finally, to recommend an investment it is not good enough to point to recent price increases.  You must justify why does price increases should occurr.  Do you think it is logical to say that "gold is the ideal investment in inflation AND in deflation"?  So it works for all seasons?  Does that not sound off a warning light?

How can you claim gold will outperformed because a fear of government fiscal problems while at the same time recognizing that government bonds have outperformed gold?  Arguments must be logically consistent.

Mon, 06/21/2010 - 07:24 | 424712 watchingdogma
watchingdogma's picture

I don't think you've looked at the actual numbers recently.  I don't track the S&P numbers, but as of right now, Silver has outperformed the DOW since 1991 - almost 20 years.  Gold has outperformed since 1993.  Anyway - "MASSIVELY" is grossly incorrect.

Mon, 06/21/2010 - 02:12 | 424604 Dr. Sandi
Dr. Sandi's picture

"Gold can only truly store value if it is monetized."

Using that logic, there is only one investment possible, CASH!

I'm not sure that's the road to long term wealth. If you're not willing to change your investment either into coin of the realm or barter for buckskins at some future point, it's not an investment.

Mon, 06/21/2010 - 03:16 | 424638 Arm
Arm's picture

"or barter for buckskins at some future point, it's not an investment"

Precisely.  Buckskins, like gold, would be a good investment in case of a monetary collapse, but you must recognize you need that level of collapse.  If you invest in gold you are investing in the collapse of sovereign states... quite frankly that is an "aggressive" call.   More precisely, gold is a long put on sovereign states.  You will only get a purchasing power adjusted payoff if the state you live in completely collapses.  Even a partial collapse will not do. 

My point to the community:  KNOW THE DRIVERS OF YOUR INVESTMENT

 

PS: It is not logical to say that cash is the best investment.  Assets are priced in units of fiat currency.  Cash is a good investment when you expect asset prices to decline (deflation).  Cash is a bad investment when there is in inflation.  Can you see inflation anywhere?

 

Mon, 06/21/2010 - 07:09 | 424704 Dr. Sandi
Dr. Sandi's picture

Exactly

Mon, 06/21/2010 - 02:13 | 424607 malusDiaz
malusDiaz's picture

During the Great Depression Gold went from 20$ -> 35$. 

 

Why would gold go up in a deflationary enviroment? Because the value of money goes up.

 

Gold is money -> Moneys value goes up in deflationary enviroments.

 

The real question is how many gallons of gas would 1 oz of gold buy you vs all other asset classes.  This all started with an unsustainable energy consumtion life style. It will end when we live below our means and can create more wealth then we destroy on a daily basis.

Mon, 06/21/2010 - 04:19 | 424658 Arm
Arm's picture

Gold declined 19% during 1931.  After massive amounts of government printing gold did go up to $35 by 1934, and then laguished there for 30 years!!  75% total return for 30 years?  Sounds like a deal huh?

http://www.nma.org/pdf/gold/his_gold_prices.pdf

What does that tell you?  30 years of the same price while every single other asset class is going up? 

To me that tells me that gold at $35 in 1934 was REALLY expensive.  People were paying a huge "fear" premium and when it did not pan out they lost big time.

Mon, 06/21/2010 - 02:31 | 424622 DoChenRollingBearing
DoChenRollingBearing's picture

Arm, H/T to you for a dignified response.

Personally I believe that each (relatively) wealthy person/family  should have at least some gold, I would say 5% - 10% in physical gold.

We are at about 6% in gold and 1% more in platinum, all physically possessed.  I am looking to kick that up tp 8% - 9% soon.

***  I never junk nicely thought out posts like Arm's.  ***

Mon, 06/21/2010 - 03:38 | 424644 Arm
Arm's picture

Thnx DCRB.

I do agree that every non-actively managed portfolio or even every relative performance oriented investor should be well diversified.  Precious metals, including gold, do have a very real and appropriate position within a balanced portfolio. 

Your portfolio weights seem perfectly reasonable.

Mon, 06/21/2010 - 02:35 | 424624 DoChenRollingBearing
DoChenRollingBearing's picture

Arm, I would go to 6% -10% PMs for a family.  Insurance and safety from .gov malefeaance.

No junks from me because of your well thought out comment.

Mon, 06/21/2010 - 03:10 | 424631 Mark McGoldrick
Mark McGoldrick's picture

There are a few problems with your rationale:  

If you believe this dire scenario, by all means take ALL your wealth into gold (or land).

Why do you presuppose that a gold investor is either all in, or all out?  Why couldn't someone store a portion of his wealth in gold?  When you argue from an "all in" position, it is very easy to make any investment look foolish. 

Gold can only truly store value if it is monetized.  Until that happens, you must make your daily transactions in fiat currency.

Of course.  No one is saying that fiat currencies are going to be completely eradicated. Sure, it makes for some lively cocktail party conversations at Dorsia with a small group of American psychos, but most people (at least me) believe that fiat currencies will continue to serve as they always have, albeit with diminishing value over time.  Eventually, all paper currency reaches its true value, zero; but that takes a really long time.  

If fiat currency deflates, the price of gold in fiat units goes down. 

Simply not true. Just look at gold priced in Euros over the past year.

The wealth preservation qualities of gold in deflation only pay off if the monetary system goes to hell.  Literally governments must not be able to issue ANY fiat currency.  

Sorry, but that's breathtakingly ignorant. Had someone bought 10,000 Euros worth of gold last summer, they would have the ability to exchange that today for significantly more Euros, which in turn, would allow them to buy significantly more seasoned lamb shanks that they can munch on while they march through the streets of Athens to protest 40 hour work weeks.    

...stay away from gold as it is in a bubble in fiat currency terms....

Well, doesn't that make an interesting/convincing argument to own gold?  The Euro deflated, and gold inflated. Viola! If you had gold, you could now exchange it for bubble prices.  Your curly-haired neighbor in Salzburg who didn't buy any gold will be drooling in jealousy as you show him your new pricey deluxe cuckoo clock royale that has a rotating fisherman and multiple rotating ducks.  Show that cuckoo clock to his wife, and you might impress her enough to bang her (if you ignore her thick ankles.)  Not only will gold get you more cash, it will get you laid. 

I think you might be confused about the relationship between fiat currency and gold prices. They don't move in tandem--both up, or both down. I don't understand why you argue from that vantage point.  But the most erroneous part of your argument is your assertion that gold is only a value of wealth if "states collapse" and fiat currencies are rendered useless.  That's simply not true, even under the most drunken state of mind.  I don't understand why you wouldn't see value in holding some portion of your wealth in gold that can easily be exchanged for currency when you need it.  If you have $10,000 in fiat currency and $10,000 in bullion, which do you think will be worth more in 10 years?  



Mon, 06/21/2010 - 03:35 | 424641 Illya Kuryakin
Illya Kuryakin's picture


 If you have $10,000 in fiat currency and $10,000 in bullion, which do you think will be worth more in 10 years?  

I haven't any idea. Which is why I have stacks of both, in their physical form and privately held .

Mon, 06/21/2010 - 08:41 | 424775 I need more asshats
I need more asshats's picture

All else being equal won't your investment plan net out to Zero?

Mon, 06/21/2010 - 04:00 | 424648 Arm
Arm's picture

I think you have to think your positions MUCH MORE before you call people ignorant.

Unless gold is monetized, it is not "money", it is just an asset.  As an asset it is subject to pricing in fiat currency.  Eg. it's price will fluctuate according to fiat currency avialbility terms.

In deflation fiat currency supply contracts, that is the definition of deflation. This means that prices fall.  All assets priced in fiatco fall in price.  Since gold is an asset it too will fall in price.

Gold can only break from this if it becomes monetized.  Monetization implies the collapse of fiat currencies, which is tantamount to a complete systemic fail.  This is incompatible with the macroeconomic scenario you claim to believe.

 

The core mistake is thinking that "Gold is money".  That just shows you don't know monetary theory, or monetary history.  Pretty much any asset can be money - essentially a means of exchange and unit of account for value accumulation.  Gold has favourable properties that make it attractive as a monetary proxy, however these only get "activated" if it is monetized.  Monetization essentially means that it is accepted in everyday commerce for transactions.   Your gold investment will have been a stellar call if one day you can go downstairs to the bakery and buy a loaf with some gold dust (or a gold backed bill)ç

 

EDIT:  Your analogy is also erroneous.  You don't own $10,000 in gold and $10,000 in cash.  You own $10,000 in fiat currency and 9.5 ounces of a metal that are currently priced at $10,000.  In 10 years you will own the same $10,000 in fiat and the same 9.5 ounces of gold.  However, the fiatco price of those ounces is uncertain.  If the fiatco's still exist, it is likely there was deflation so in fact those $10,000 in fiatco buy MORE units of assets; eg. you may find your 9.5 ounces are only $5,000 in fiatco terms.

Mon, 06/21/2010 - 05:53 | 424672 Mark McGoldrick
Mark McGoldrick's picture

Sorry, but you're wrong on many levels. You are confusing economic deflation with currency debasing.  

First though, very few people who buy gold do so because they believe they will have to use shreds of gold to buy some baguettes.

Most people buy gold to store wealth, not to use as a bartering tool for milk, bread or lamb shanks.  That means, they buy bullion so that in 1, 5, 10, 15 or 20 years from now they can exchange that gold for much more fiat currency than they would have had otherwise.  

Assume you have two shoe boxes.  In box A, you have $1250.  In box B, you have an ounce of gold.  In 10 years, which box would you rather have? Unless you can build a time machine out of a DeLorean like Michael J Fox did, it is impossible to know.  It is very reasonable, however, to assume that fiat currencies will continue to diminish in value which will have an inverse affect on commodities like gold.  In 10 years, it is highly probable that the gold in Box B can be exchanged for more cash than the $1250 in box A.

The lure of gold is due to the debasing of currency, as most governments solve their problems with a printing press. As a currency is debased, it requires more of that currency to buy an ounce of gold or a barrel of oil. It is an extremely safe bet to assume that the debasing of the US dollar (or Euro) will continue over time.  That will make the price of gold rise. 

Secondly, I am NOT saying that gold is money.  I am saying that gold stores wealth better than paper currency.  What is arguable is whether gold will store more wealth than a basket of stocks representing the S&P.  

Third, I've just noticed your EDIT, and think I understand why you're trying to jam the square peg in the round hole: there is a huge difference between economic deflation (where everything falls in value) and the devaluation of a fiat currency. When people buy gold to store wealth, they do so for fear of the diminishing value of a currency, not because of economic deflation. The debasing of a currency does not mean that gold falls in tandem with it; the exact opposite happens.  Just look at the Euro in terms of gold over the past year. Or look at the price of oil in terms of US dollars in 2007.  Those are very clear examples of the INVERSE relationship between currency debasing and commodities.

Once you realize that the debasing of a currency is the true reason people buy gold, you might actually buy some yourself.  As long as you think it's a hedge against economic deflation, you will remain confused.  

 

Mon, 06/21/2010 - 10:01 | 424858 Treeplanter
Treeplanter's picture

Current circumstances are beyond argument.  If you think currencies are headed for collapse then you want a currency that people trust.  5000 years of history say that currency is gold and silver.  Anything can happen, we place our bets on probabilities.  

Mon, 06/21/2010 - 10:19 | 424879 weinerdog43
weinerdog43's picture

Good comment, although I don't agree.  What I believe you are overlooking is a currency devaluation.  If for example, the dollar was devalued such that 100 old dollars will now buy 1 'new dollar', how will that affect gold?  If you had $10k of old dollars and $10k worth of gold, the value of the gold has not changed, but the old dollar certainly has.  In that case, selling your gold for new dollars should be a nice way to preserve your wealth without ever having to monetize the gold.

Mon, 06/21/2010 - 06:29 | 424695 Anton LaVey
Anton LaVey's picture

Again, your post has been heard a thousand times before on ZH. You are not posting anything new, or anything even remotely interesting.

Just for the sake of argument, here are my scenario for the future:

  1. Deflation: keep cash under your mattress (not in a bank), and you will be king of the hill. Gold loses some value, but retains much more value than any other investment vehicle. Time to load up on the bling-bling if you have the cash. If deflation is the order of the day, expect more and more (and more...) QE, which leads us straight into:
  2. Inflation (or hyper-inflation): Gold and Silver retain value, or increase value, and make you king of the hill. Cash is burned to warm you up in winter and inflation reduces the debt of everyone down to much more manageable levels. Time to load up on real estate and solid stocks (or anything else that strikes your fancy) at the expense of the lenders (leverage in time of inflation is the gift that keeps on giving).
  3. Profits.

Please note that I have invested money accordingly (30% Cash, 50% Gold, 20% Silver). I am going to move fairly large chunks of savings into Silver soon, as it is much more affordable than Gold, and also has great potential to the upside.

At this stage, I don't care what happens: inflation? Got Gold & Silver. Deflation? Cash, truckloads of it. Hyperinflation? Sure, I am waiting, "bring it on", baby.

Now, my turn: can you honestly see any way that the current situation is not going to devolve into one or the other? Governments the world over have made sure that complete melt-down is basically certain. There will be deflation. If not deflation (or following it) we will get inflation and complete currency melt-down. PERIOD.

Anyone who does not have large quantities of Gold and Silver by now, "just as an insurance", is a complete fool. And please note that I don't worship at the altar of Gold and Silver: to me, there is nothing "mystical" about PMs. They are just a rational, sound, forward-thinking investment.

And one more thing: Gold may lose, say 90% of its value tomorrow. But it will always be worth something. Bonds, Stocks, Real Estate, all of these can go down to 0 (or close enough). Gold, on the other hand, guarantees that you will AT LEAST keep some of your money. Do you know any other investment class that can boast of this? You can't eat Gold? Sure, you can't eat stocks or cash either.

Mon, 06/21/2010 - 01:59 | 424593 Pooh-Bah
Pooh-Bah's picture

Gold goes up and gold goes down.  Just like everything else.  It is not special.  It is not the only true money.  It is a hard asset.  If you buy it and it goes up, you'd better sell it before it goes down - because it will go down after it has finished going up. The peak of gold will be like the peak of housing, human enthusiasm that can vanish quickly.

Mon, 06/21/2010 - 06:30 | 424696 Anton LaVey
Anton LaVey's picture

That was the most content-devoid comment on ZH I have seen in a long time.

And that says a lot.

Thank you for stating the obvious, Captain Obvious.

Mon, 06/21/2010 - 08:45 | 424779 I need more asshats
I need more asshats's picture

Reminds me of the work of Reggie Milton from BustBlogBoom.com

Mon, 06/21/2010 - 02:13 | 424608 merehuman
merehuman's picture

11:11 pm pacific time. Gold is on the upward move.

Mon, 06/21/2010 - 04:38 | 424667 theprofromdover
theprofromdover's picture

Gold

Land (Agricultural or Real Estate)

Water

Oil (raw energy)

Slaves (that's us)

 

They change places from time to time.

Mon, 06/21/2010 - 06:40 | 424699 DCon
DCon's picture

CNBC just uttered the infamous "you can't even eat Gold".

 

Said people hate talking about Gold. What people?

 

Mon, 06/21/2010 - 07:27 | 424713 doggings
doggings's picture

CBNC are just utter jokers, if / when you see those numpties down at the unemployment office please give them a slap round the back of the head from me.

disclosure, 3 months worth of rolling cash, savings 80% gold, 20% silver

and lots of popcorn ..bring it on..

Mon, 06/21/2010 - 07:59 | 424726 Paper CRUSHer
Paper CRUSHer's picture

 To CNBC bitches, all Zerohedger's will continue munching on 'gold biscuits' while we watch you travel down the beautiful road.

Yep,travelling down the 10 ft wide "road to hell"in Bolivia.

http://www.flickr.com/photos/beppo-12/502199204/sizes/o/in/set-721576002...

Mon, 06/21/2010 - 08:14 | 424750 Grand Supercycle
Grand Supercycle's picture

 

EURO buying support i've mentioned over the past few weeks has resulted in a bullish basing pattern on the daily chart. The important weekly chart remains bearish though.

http://stockmarket618.wordpress.com/about

Mon, 06/21/2010 - 08:21 | 424757 Sean7k
Sean7k's picture

You either "get" gold or you don't. Bad money runs good money to ground. I.E. currency debasement. Pricing gold in currencies is just a way to keep score. The inflation of the dollar over time is how you measure gold's value. 

Arguments of gold's price during the depression cannot be defined in dollars. The price was government determined. Consequently, the government attempted to seize it and people buried it instead. 

The Nixon decision to allow it to float allowed gold to reflect the anxieties of the markets. It still does. 

You don't need complete collapse of a currency to see gold as money- see zimbabwe or the Weimar republic. The collapse only happens when you can't buy gold at any price.

Gold is not an investment. Gold is insurance.

One must ask themselves: What is the chance that my investments will be devalued because they are denominated in a currency that is being debased? Even as the rise in price?

In that case, counterparty risk outweighs the benefit of potential profits. Gold becomes a store of wealth until the smoke clears. 

If someone doesn't like gold as a store of wealth, it is usually because they fear the withdrawl of capital from the markets "they" are dependent on. Otherwise, why would they care? 

The small investor has nothing to fear from gold, but everything to fear from debased currency.

Mon, 06/21/2010 - 08:23 | 424761 poggi
poggi's picture

For decades, Jude Wanniski wrote and lectured about the value of a gold standard.  Too bad nobody read and took his counsel:

http://www.polyconomics.com/essays/esy-840405.htm

Mon, 06/21/2010 - 08:47 | 424781 sharkbait
sharkbait's picture

New poster on this board but have become an addicted reader.

Gold has been a store of value for thousands of years.

Was the value of gold for industrial and other uses greater or less than now?  answer: less.  gold had zero industrial value until relatively speaking, recent history.  It's use as the most efficient room temperature electrical conductor was tough for the ancient Sumerians to take advantage of.

 

Are the issuers of fiat currency more or less trustworthy now than in the past? 

answer: less

 

Buy gold, early and often.

 

Mon, 06/21/2010 - 08:59 | 424792 proLiberty
proLiberty's picture

It is true that a lot of people worship wealth in whatever form is most meaningful at the moment.  But the God of this "text-based" religion tells us that eventually all wealth will perish and certainly cannot transcend the grave whereas faith in Him allows us to do just that.  God calls on us to understand the proper role of wealth in our lives because God knows that gold is a primary commodity to store wealth and for use as a medium of exchange.

For example, see Genesis 24:34-35:  So he said, "I am Abraham's servant. The LORD has greatly blessed my master, and he has become great. He has given him flocks and herds, silver and gold, male servants and female servants, camels and donkeys.  (ESV)

And, The silver is mine, and the gold is mine, declares the LORD of hosts.  (Haggai 2:8 ESV)

Mon, 06/21/2010 - 10:08 | 424867 Treeplanter
Treeplanter's picture

It seems that Abraham saved like Jesus and invested like Moses.  Did okay for a poor boy from Sumeria.

Mon, 06/21/2010 - 09:05 | 424797 Sabremesh
Sabremesh's picture

Equating gold to God is a bit silly, frankly. Gold demonstrably exists whereas there isn't a shred of evidence for a desert God. Gold has a number of unusual properties which together make it a unique substance and ideally suited for jewellery and coinage. You do not require faith to see that gold is rare and that society regards it as valuable. Just how valuable is hard to determine, because it fluctuates with supply and demand, but so does the value of everything else.  

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