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Guest Post: Gold As a Hedge: A Back-of-the-Envelope Calculation

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Tue, 04/26/2011 - 11:25 | 1207915 Magnix
Magnix's picture

Well, Ill keep buying gold nuggets (and silver) to reach a ounce and because they're affordable!

Tue, 04/26/2011 - 11:26 | 1207921 Dr. Richard Head
Dr. Richard Head's picture

GOLD IS IN A BUBBLE!!!!! /sarc

Tue, 04/26/2011 - 12:11 | 1208091 DoChenRollingBearing
DoChenRollingBearing's picture

C H Smith and Rick Ackerman have moved closer to FOFOA's view.  Smith referenced FOFOA's latest article above.  The article is long and dense, but stuffed with mind-blowing observations...

In the comments section of FOFOA's article, you will note both Smith and Ackerman commenting positively on FOFOA.  They have become converts...

IMO FOFOA is right.  If you do not have any, get some physical gold.  If you plan your affairs right, it will carry your wealth through the coming hyperiflation or whatever.

fofoa.blogspot.com

Tue, 04/26/2011 - 13:30 | 1208285 Shell Game
Shell Game's picture

Smith referenced FOFOA's latest article above.  The article is long and dense, but stuffed with mind-blowing observations...

Couldn't agree more, Sr. Bearing.  FOFOA's latest essay held many epiphanies.  Sad that most humans on this earth have had little to no schooling in money, and far too few have searched out these lessons on their own.  FOFOA is one of the finest sites for understanding money that I've found.

 

Tue, 04/26/2011 - 14:29 | 1208538 Ignatius
Ignatius's picture

"The road will seem so straight and fair to travel, you will kick yourself for stumbling through the brambles for so long, and wonder at your neighbors who still can't see the path, though it is truly a freeway." (Aristotle, courtesy of FOFOA)

 

FOFOA has few peers on the subject of money and gold.

Tue, 04/26/2011 - 14:40 | 1208570 malek
malek's picture

Yep, and even Mish and Karl Denninger have stopped declaring gold buyers/owners to be completely nuts. While they're not yet promoting gold ownership, it is a big step, and in the right direction in my opinion.

Tue, 04/26/2011 - 11:26 | 1207922 Whizbang
Whizbang's picture

If there is a full devaluation of fiat currencies down to 0, your gold will be less valuable than lead, which actually has uses in the real world. Get real you clowns

Tue, 04/26/2011 - 11:36 | 1207941 SheepDog-One
SheepDog-One's picture

I agree, this theory that the present valuation of world fiat currencies $140 trillion will be made whole by a rise in gold to $30,000 an ounce is totaly ridiculous.

Upon fiat USD world reserve currency replacement, gold will be valuable only to melt down and cast bullets.

Tue, 04/26/2011 - 13:36 | 1208297 chumbawamba
chumbawamba's picture

Yours and Whizbang's are rather narrow, shallow, uninformed and unedcuated views of gold.  You know not of what you speak.

I am Chumbawamba.

Tue, 04/26/2011 - 14:06 | 1208426 FeralSerf
FeralSerf's picture

Gold is a better material for bullets than lead due to its greater density.  Tungsten is good too.

He who has the best bullets (and delivery mechanisms thereof) wins.

Tue, 04/26/2011 - 17:23 | 1209231 Stuck on Zero
Stuck on Zero's picture

Deplete Uranium is the best.

Tue, 04/26/2011 - 23:16 | 1210114 bonin006
bonin006's picture

Tungsten is hard, much better for armor penetration than lead or gold, but will wear out your barrel. A thin lead (or gold) plating on the tungsten will fix this. 

Tue, 04/26/2011 - 11:34 | 1207962 dbach
dbach's picture

Are you suggesting that without a fiat currency we will revert to bartering? That there will be no medium of exchange?

Tue, 04/26/2011 - 11:43 | 1207986 SheepDog-One
SheepDog-One's picture

Its amusing to me how people have no placated themselves into believing a USD world reserve currency default is nothing, and we'll just get some equally valued 'gold backed' paper exchange at 1:1 face value some morning and we all just go on like nothing at all happened. Truely a sick, braindead, stupid nation.

Tue, 04/26/2011 - 11:37 | 1207973 Re-Discovery
Re-Discovery's picture

We get it.  'Gold is useless'.  'Silver is a joke'.  We are just idiots who never learn.  It's to the point where you guys should stick to your theses, and we will with ours.  I NNNEEEEDDD people like you.

Tue, 04/26/2011 - 11:55 | 1208033 SheepDog-One
SheepDog-One's picture

I never said gold wouldnt rise, it probably will quite a lot. But $30,000 an oz? Thats to match up with the present or perceived 'value' of all this paper floating around...theres never going to be $30,000 oz coins upon a USD default. And well before a dollar default PM's will be declared illegal and confiscated anyway and to all those who say that wont be 'complied' with ust look how panicky everyone got over a few % drop in PM's.

Tue, 04/26/2011 - 13:39 | 1208313 chumbawamba
chumbawamba's picture

Again, your views are ignorant and uneducated.  Perhaps you should read some history (there's 5000 years of it for your perusal) before you make such comments.  I'd explain where you're wrong but you wouldn't understand anyway.

I am Chumbawamba.

Tue, 04/26/2011 - 15:31 | 1208750 FEDbuster
FEDbuster's picture

Right now an oz of gold will buy 1 AK47 ($400), 1000 rounds of 7.62x39 ($225), a good Katadyn water filter ($175), years worth of inexpensive storage food staples ($600.) and you can put together an ok first aid kit for $100.  If the S really HTF, those items won't be available for any price, let alone an oz of gold.  Gold requires some level of rule of law, a supply chain of goods and an easy way to determine it's value.  Investing in gold is a "systems up" investment.  I am not an anti gold guy (I own some), but in a complete economic crash I would rather have the five items listed above than an oz of gold.

Another way to think about it is if I unable to procure food and water any more, would I trade my limited food and water for your gold?  Hell no.  With no means of finding out what "spot" is for gold, would I trade anything of practical value for gold?  No.  If you haven't read the book "The Road", you really should.  It takes you to the place where gold has no value, but a good pair of boots are priceless.

Tue, 04/26/2011 - 15:49 | 1208819 chumbawamba
chumbawamba's picture

Right, because the world is always either black or white.  When it's not white, it's black.  And when it's not black, it's white.

I know these things, okay?  That's why along with my gold and silver I also have an armory, ample ammunition to supply the various weapons within, stores of seeds and a greenhouse to grow food year round, etc.

Unless you plan on living in Bartertown forever, things do eventually reorganize, and there will ALWAYS be a place where your gold has monetary value.

If you want to sit here and argue pedantics then count me out.  I have more prepping to do.  I need to go stockpile history books to hand out to all the doe-eyed Mad Max's that will be passing by my farm on their way to Morrow Morrow Land with a flock of mostly prepubescent children, bookmarked to the chapter after the great cataclysm where things get rebuilt.

I am Chumbawamba.

Tue, 04/26/2011 - 16:19 | 1208949 tmosley
tmosley's picture

Yup, it's called "utility".  Having one AK47 is as good as having a hundred, if it's just you doing the shooting.  However, there is no loss in utility from having more gold or silver.  

Other things SHOULD be bought first, but they only need to be bought once.  Gold and silver can always be accumulated.

And yes, anyone calling for an end to trade (the only situation where gold would have no value) is a moron.  As long as there are more than two people in the world, there will be trade.  As long as there are more than a few thousand people in the world, they will use gold as currency (if they aren't fools).

Tue, 04/26/2011 - 18:08 | 1209374 goldenrod
goldenrod's picture

Why does it have to be one extreme or the other? Either we all drive SUVs to Starbucks for a latte or it is Mad Max.  I think it is going to be something in between.  Excessive debt, peak oil and a declining currency will reduce the standard of living of more and more people.  Gold protects your assets from currency debasement.  That is all.

 

Tue, 04/26/2011 - 11:52 | 1208029 writingsonthewall
writingsonthewall's picture

Try trading your lead for a boat trip out of the country fool. I'll get passage with my gold while you're still trying to sell your ass for a space in the hold.

 

Captialists know the price of everything and the value of nothing....the problem is the 'price' is in 'toilet paper' - which their linear brains cannot handle!

Tue, 04/26/2011 - 14:12 | 1208471 tmosley
tmosley's picture

Again, here is your problem--you can't tell the difference between capitalism, which is what you are practicing (since gold is capital), and socialism, which you accuse the other of practicing (ie extracting a boat ride at gunpoint).

Your little head is all twisted up.  But at least your actions are correct.

Tue, 04/26/2011 - 11:59 | 1208041 trav7777
trav7777's picture

If there is a full devaluation of fiat currencies down to 0, your gold will be less valuable than lead, which actually has uses in the real world.

This is just idiotic nonsense...the largest economy south of the border and 5th most populous country on the planet, has seen COMPLETE devaluation of more than one currency just in the past couple of decades.  There has been no time at which fucking bullets and the use thereof are a substitute for anything.

Tue, 04/26/2011 - 20:14 | 1209703 Al Gorerhythm
Al Gorerhythm's picture

There has been no time at which fucking bullets and the use thereof are a substitute for anything.

How about civility, honesty, integrity, responsibility. 

Tue, 04/26/2011 - 13:34 | 1208301 Nate Taggart
Nate Taggart's picture

OK, then buy silver, unless you think the entire electronics industry (and most other industries) is going to find a replacement.  

Tue, 04/26/2011 - 22:26 | 1209691 Al Gorerhythm
Al Gorerhythm's picture

@ Whizbang,

I don't think that there will be a cataclysmic full devaluation either (A-la Zimbabwe) but you can't deny a possibility.

The game play is to rely on the delivery success of the adage (a belief that a statement must be true because of the duration of its use): Paper currencies carry enduring intrinsic value. 

A cursory investigation of the performance of ANY paper currency, proves the adage to be thoroughly unsubstantiated. A telling and enduring negative performance indicator is the demand interest rate that is tied to paper currencies. It is a risk demand variable, calculated in the pursuit of returns that eliminate purchasing power loss over time, when saving or extending credit. Par value risk, Option Theory 101.

The current volatile erosion of purchasing power (see USDX) is a measure of over-supply, instilling a valid a loss by credit holders, in the "Good Faith and Credit" of the issuers.

Central currency issuers realize that through their oversupply, if there is a complete loss of trust, creditors will demand tangibles as settlement for their credit notes.In other words, they demand immediate and full settlement, not payment.

In order for the issuers to maintain the illusion of value (as delivered to the masses) and to satisfy creditors, the issuers won't default completely. They will promise to pay more via higher interest payments or cash payments, (creditors taken care of) and revalue their reserves (numeraire) which just happens to be the gold.

Gold is the foundation that supports the bridge, interest rates are the keystone that completes it. Gold has to and is being revalued, so that reserve ratios allow credit to be extended (a balanced system). That's what is happening, steadily, inexorably, drip by drip until it is worth the risk to carry credit on the books, against income. Smart creditors purchase gold in anticipation of its revaluation. When risk ratios are thought to be fairly balanced, gold will be exchanged for paper.

You seem to be convinced that these issuers are delivering reasonable returns on their notes. I see over-issuance, ergo a loss of my faith in their good credit. Honesty is a hallmark and measure of good faith. After the GFC, I don't see anyone in chains, other than a couple of bit players. I'm asking for a return to honesty in dealings with these issuers and am abandoning them until I see the evidence to the contrary.

Your opinionated statements, supported by ad hominem attacks, make for shallow or thin deliberations. Show some substance.

Tue, 04/26/2011 - 11:26 | 1207924 mule65
mule65's picture

Avoid Stocks.


- Tyler Durden

Tue, 04/26/2011 - 11:30 | 1207937 Tyler Durden
Tyler Durden's picture

"Forget
the circularity of CDS shorting... this one should make your head
explode... This has long been perceived as the FED's very last
recourse. Maybe one should really start buying stocks ahead of the
uber-hyperinflation that will imminently ensue. We recommend wheelbarrow
stocks.This is textbook back against the wall. But at least the stock
market takes another crutch up." March 18, 2009 - Tyler Durden, on the start of QE1, and since which precious metals have outperformed stocks by about 2.5 to 1
Tue, 04/26/2011 - 14:46 | 1208582 Ignatius
Ignatius's picture

Tyler

 

In light of Ackerman's and Smith's recent bow to FOFOA on the issue of hyperinflation, do you think you might consider adding FOFOA's blog to your links? His most recent post (4/23) on the Hyperinflation/Deflation debate is a gem.

Tue, 04/26/2011 - 11:34 | 1207949 SheepDog-One
SheepDog-One's picture

OH snap, mule ass-rammed.

Tue, 04/26/2011 - 11:28 | 1207930 writingsonthewall
writingsonthewall's picture

"HUGE GIANT BIG FAT DISCLAIMER: Nothing on this site should be construed as investment advice or guidance. It is not intended as investment advice or guidance"

 

Too late - I just bought all the gold in Fort Knox...

 

....which is nothing, just an empty warehouse.

 

Here is some investment advice you should all heed.

"FIAT currencies always fail"

Here's the historical evidence.

http://dailyreckoning.com/fiat-currency/

 

Past perfromance DOES lead to future failure.

Tue, 04/26/2011 - 11:33 | 1207936 SheepDog-One
SheepDog-One's picture

You bought the WHOLE 5 oz of gold plating in Ft Knox?

Tue, 04/26/2011 - 11:40 | 1207977 Hephasteus
Hephasteus's picture

Well you can sell it 20,000 times and get the money each time and then charge people storage fees. It's a fraud that has been going on since the 1600's. It just changed from run out of town to kill everybody.

Tue, 04/26/2011 - 11:42 | 1207983 luk427
luk427's picture

+ Tungsten

Tue, 04/26/2011 - 11:43 | 1207984 Long-John-Silver
Long-John-Silver's picture

Why would anyone buy Gold plated Tungsten?

Tue, 04/26/2011 - 13:40 | 1208316 Sudden Debt
Sudden Debt's picture

As a paperweight it does look cool :)

I have one on my desk.

Tue, 04/26/2011 - 14:12 | 1208462 FeralSerf
FeralSerf's picture

I have a tungsten plated gold paperweight on my desk to discourage thieves and other gov't agents.

Tue, 04/26/2011 - 11:29 | 1207933 SheepDog-One
SheepDog-One's picture

Assumes that the PRESENT 'value' of fiat currencies will be matched by a rise in gold to match it? Nonsense, gold may become a backing of a world currency, but the value of currency in the world will be far smaller than it is today. This article jumps off on the wrong foot. Gold will rise to match $140 trillion in value to replace present fiat currency, or $30,000 an ounce? Gold will rise, but thats just retarded.

Tue, 04/26/2011 - 11:45 | 1207995 Long-John-Silver
Long-John-Silver's picture

Please Google "Zimbabwe Inflation" and tell us again how $30,000 an ounce Gold is retarded.

Tue, 04/26/2011 - 11:51 | 1208017 DiverCity
DiverCity's picture

Folk like SheepDog, even though I well agree with him that we face a looming financial collapse (or indeed have already functionally collapsed), have a mental block because their reference point is USD.  Hence, $30K/oz. of gold to them looks like an outlandish figure.  But that's what's really retarded -- the notion that $30K will buy a whole hell of a lot after revaluation.  Free your minds, grasshoppers.

Tue, 04/26/2011 - 12:02 | 1208037 SheepDog-One
SheepDog-One's picture

Well thats what Im saying, in effect. Its not ME who doesnt see the currency issue for what it is, its after the USD is replaced by whatever, we have nothing. Not $140 trillion in newly valued gold, just a banana republic without even bananas to sell.

Guys, youre never going to be trading coins at the store for $30,000, upon a USD default, people will be using coins as slingshot ammo or melting them down to cast bullets. This 'pain free world reserve currency default' scenario is for the birds.

Tue, 04/26/2011 - 12:18 | 1208121 DoChenRollingBearing
DoChenRollingBearing's picture

SheepDog, I normally agree with almost everything you write.

But, not on this.  If/when gold has its big move (when paper gold dies), I may buy the two gas stations in the town I live in with my $55,000 gold...  Or the maybe nearby toll bridge...

If I do not BUY anything big, then my gold will go to my child (or grandchildren in the future?).

I certainly will not be taking my gold coins to the coin shop for fiat.

Tue, 04/26/2011 - 14:12 | 1208472 FeralSerf
FeralSerf's picture

It's too bad that the gas stations will be out of gas by then.

Tue, 04/26/2011 - 14:20 | 1208506 dussasr
dussasr's picture

I'm long term bullish on PMs and bearish on the dollar, but I am with Sheepdog on this one.  The PMs will only go up for so long until they are confiscated by the govt or some firebrand politician starts WWIII or maybe both.  The desirability of holding gold reaches its zenith at precisely the same moment that holding it becomes illegal.

You can't just change from one economic paradigm to a completely different one without the high likelyhood of violence.  There will be too many unemployed/hungry people looking for vengance and someone to blame for their condition.  Who will they target?  Well the "evil" people with the gold of course!

Tue, 04/26/2011 - 14:35 | 1208547 trav7777
trav7777's picture

can you point me to where the fuck else gold has ever been illegal?

I mean I look through a ton of hyperinflations and I don't see it...

Tue, 04/26/2011 - 16:24 | 1208986 dussasr
dussasr's picture

As soon as people begin to loose confidence in fiat they try to dump it for gold.  In a futile attempt to prevent that the government outlaws gold.  They follow the same play book every time.  Argentina, Mexico, and the US have all done it.  I don't have the exact number but gold ownership is still illegal in some 40 or 50 countries today.

Wed, 04/27/2011 - 08:08 | 1210746 trav7777
trav7777's picture

huh???  When the fuck did this ever happen in Argentina or Mexico?

Name the 40 or 50 countries.

Tue, 04/26/2011 - 15:47 | 1208811 Long-John-Silver
Long-John-Silver's picture

Here is how every post currency collapse economy operates.

 

Merchants pop up and setup general stores.

They set up a TAB system where you bring in goods where-by your TAB is credited.

As you buy goods your TAB is taken down.

Merchants like Gold and Silver because they can pay to have large amounts of goods shipped in.

Services will be included in this system. Say you are a mechanic and repair all sorts of stuff that can't be replaced now. The Merchant backs up your labor charging the customers TAB while adding to the mechanics TAB. In effect the merchant is a bank as well but is using goods and services instead of the failed currency.

Tue, 04/26/2011 - 12:04 | 1208059 LRC Fan
LRC Fan's picture

Sorry but this sort of logic doesn't work on idiots.  How many Germans do you think would have agreed if you warned of $1 trillion marks for an oz of gold?  They would have laughed you out of the room.  It's the same thing now.  I try telling friends/family silver and gold will go absolutely to the moon in terms of dollars, and eventually won't be available for dollars and they laugh right in my face.  They actually think higher prices are good, because it's all proportional and our wages/stock market "winnings" go up too, so inflation doesn't matter.  We'll see, when gas hits $5 then $6 and then $50 in short order, who is right.

Also everyone laughs if you mention Zimbabwe, saying "that's a 3rd world country" or something stupid.  When I bring up the fact that it makes our situation of trillion dollar debts and deficits that much worse, since it will bring down everyone else, their eyes glaze over.  Just keep buying silver and gold while you still can score them with dollars.  Eventually everyone will be forced to wake up, and then gold and silver will go "offerless" as Tyler mentioned yesterday, at least in terms of US dollars. 

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