Wikinvest Wire

Gold, the solution to high commodity prices

Friday, June 20, 2008

If policy makers were astute, they would quickly seize on the obvious solution to today's soaring commodity prices that are causing so much pain and suffering around the world as the rising costs of food and energy make life increasingly difficult for individuals and businesses:

Direct "commodity speculators" into gold - the only commodity that does not adversely affect the general population when its price soars.

In a world full of fiat money, it should not be surprising that investors of all stripes are gravitating to hard assets. Whether they be labeled "investors", "speculators", "index speculators" - call them what you'd like - more than any time in recent memory, people are choosing to exchange paper money for some claim on a hard asset.


In its simplest terms, too much money and credit have been created in recent years and now much of this money is looking for a place to go. Where else does it have to go?

  • Stocks? Yeah, maybe some energy stocks.
  • Savings? At 3 percent? A little.
  • Bonds? Nah.
  • Real Estate? Not yet.
  • TIPS? Are you serious?
That leaves a lot of money left over and some of that money is being used to buy oil, corn, and other goods on commodities futures exchanges that really weren't set up to handle the sort of volume they are now seeing.

Endowment funds, hedge funds, pension funds, and retail investors are exchanging paper money for hard assets like never before and this is surely having an impact on prices. Exactly what the extent of the impact is remains unknown, but even if it's only five or ten percent, we'd all rather see gasoline prices at $3.70 rather than $4.00.

Every little bit helps.

No One Cares About Gold

Back in 2006, when gold nearly doubled from $425 an ounce to $725 an ounce, no one really cared. Financial commentators and economists noted the increase in the price of the yellow metal and then laughed at the renewed interest in the "barbarous metal" and scoffed at "gold mining clubs" - no one got hurt and there were no riots.

At the time, corn cost about a quarter of what it does now and oil had risen from about $55 a barrel to just over $70 a barrel - soaring commodity prices were more a source of amusement than a reason for oil producing nations to convene meetings of "heads of state" to address the problem.

Fast forward to 2008, we now find the situation is reversed - energy prices are soaring while gold has risen only modestly - and it's nearly the end of the world.
If gold were to rise to $5,000 as recently postulated, would it make any difference to the average person?


Why not encourage commodity speculators to buy gold (and maybe silver too) and leave other commodities alone?

If policymakers really want to stop commodity prices from rising, they should immediately ban all speculation in all commodity markets except for gold (and maybe silver too) and cease all sales of gold bullion from central bank or IMF vaults.

Surely, that would send the prices of food and energy tumbling.

Full Disclosure: Long GLD, DBE, and SLV at time of writing.

[Note: This article is satire, tongue-in-cheek, not to be taken (too) seriously. Please don't call me stupid because you are unable to discern serious market commentary from satire.]

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Anonymous said...

TIM.... You've gone and spoilt it with that last note.... Some of the most entertaining comments on your blog are when you write a piece like this and nitwits call you stupid....

Anonymous said...

This is basically what will happen naturally anyhow once prices go so high there's no money to be made. Then the trickle into gold and silver will become a stampede.

What we have though is governments actively discouraging gold, which artificially jacks up everything else as you explained. Why is global inflation as bad as it it? GOVERNMENT!

Anonymous said...

This move is already underway. Just look at the two over that last month since oil and gasoline became front page news and the focus of congressional hearings. The bottom for gold is in, the top may be in for oil.

Anonymous said...

The top ain't in for oil. Gold is lagging because it directly competes with that toilet paper in your wallet someone convinced you has value. Wait until exporters demand payment for oil in a hard currency. If I had an oil well, I'd take gold or silver eagles. They're dollars, and have value. FRN's do not.

Anonymous said...

I actually don't understand why gold isn't also a "fiat currency." It has little intrinsic use, like corn or oil (or even silver or platinum, to some extent). How is it different from shark teeth in micronesia, or beanie babies in the 80s? Governments can't create those out of thin air, either. If the only answer is it has a longer history of people using it as a currency or measure of value, then I expect a wampum etf shortly, to go with a shrunken head etn. I find zealous gold bug talk to be a little circular, and unnerving, personally. It seems to me that, at best, gold cannot outpace inflation, as the arguments for it seem to me to devolve into recognizing that an increase in the price of gold actually IS inflation. I don't understand how it could do better than the rate of inflation over any extended length of time, and therefore be at best a store of value, so I guess I am the idiot, I find this a very interesting and thoughtful web page, though, so don't mean to offend anyone, and certainly have my own commodity and commodity stock investments and trades, as well as a fair share of renminbi (a nicer Fiat, that, unlike the American model, is not stuck in reverse).

Anonymous said...


Gold (or silver) isn't fiat because it is believed that a people free to choose will indeed choose it overwhelmingly over other forms of money. Consult for economic arguments as to why.

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