Wikinvest Wire

The Time Is Surely Not Far Off

Thursday, September 15, 2005

As gold makes attempt after attempt to once again surpass and hold the $450 per ounce mark and then take out the $457 level that marked a new 18 year high last December, more and more commentaries about the yellow metal are popping up in all sorts of places. Somehow these recent commentaries are different.

It used to be that there were only two sides to the gold story - the story told by economists and the story told by gold bugs.

The economists would say that gold is a "barbarous relic" that pays no interest and has been relegated to its proper place as but a footnote in history - that today's financial wizards are wholly capable of managing fiat money and that the world is a better place without the restrictions on money creation that were in place when money was linked to gold.

The gold bugs would respond by pointing out that today's fiat money has no intrinsic value because it is backed by nothing other than confidence in the government and the central bank which issues it - that ultimately, it will revert to its intrinsic value because of promises politicians can not keep and the hubris of central bankers.

Today there seems to be a growing middle ground when it comes to gold. Some question the current relationship between the oil price and the gold price and note that it is far from historical norms. Others wonder why gold has nearly doubled in value since the technology boom went bust and real estate became the world's primary driver of wealth creation.

An excellent example of this new middle ground is this Buttonwood column that appeared in The Economist the other day. This excerpt makes clear that at least one economist at The Economist is a bit perplexed with his current understanding of gold's place in the world. The writer seems less perplexed about gold's future.

Just as inflation has, until now, lain low, and gold with it, America’s dollar has also been resisting arrest. Gold is after all a monetary metal, an alternative to the paper currency that replaced it at the heart of the world’s trading system, when times are tough. But they haven’t seemed tough so far. Despite America’s famous twin deficits, everyone else’s currency has been even less appealing, and big exporters such as China have had their own reasons for propping up the dollar. Now, as Katrina heaps billions on a national debt that is already close to $8 trillion, might that perception change? The time is surely not far off.

For at the end of the day, the price of gold reflects confidence, more than anything. When people are confident that their central banks will control inflation while permitting the economy to grow, when they believe that paper assets are worth something approaching their face value, they buy gold to wear but not to put in a safe. Alan Greenspan has achieved the remarkable feat of suspending disbelief in America’s gerrymandered finances for the past few years. On his departure, watch the gold price soar.
What do we think? We think everyone should own at least two one ounce gold coins so that occasionally they can be held in one hand - to appreciate the density and the weight, to admire the luster, and to hear the sound that is made when precious metal comes in contact with precious metal.

We also think a number of coins far greater than two would be preferable to just two.

As we write this today, gold has once again topped the $450 mark and looks to soon be making new 18-year highs. Then it's on to new 25-year highs in the $500 range, at which point, we sense that the world will start noticing gold in a big way, regardless of what economists say.

Got gold?


Anonymous said...

the funniest thing about gold coins, at least the American Eagle gold coins, is that it has a U.S. dollar value stamped right on it. The one ounce American Eagle says $50, which is I guess what you'd get if you go to a bank (would banks give you $50 for one of these?) but if you go to a coin dealer, you'll get $450.

Anonymous said...

Interesting, since I have never seen a Silver coin designated that way.

Anonymous said...

The Silver Eagles are designated as being one dollar.

Anonymous said...

Just goes to show the sense of optimism prevailing in central bankers minds - that they believe that 50 lousy dollars might be worth one ounce of gold.

Anonymous said...

Canadian silver 1 oz maples are denominated as $5 Canadian. As the US Dollar continues to erode against the Canadian dollar, that begins to approach $5 US.

For US investors, the maple could be the least risk investment of all time with a lot of upside.

GRL said...

Speaking of the values stamped on U.S. bullion coins, I have sometimes toyed with the thought of what would happen if we re-monetized the dollar, by simply chopping off a zero, so that $10 of today's fiat money would be worth $1 of "new money." In today's terms, those $50 gold bullion coins would really be worth about $50, copper pennies and silver coins could be put back into circulation, and, who knows, maybe the fed could even re-open the gold window.

Anonymous said...

Hitler did something similar with the mark. This tactics effectiveness depends on monetary policy going forward from that point and the publics faith in the government that chooses such a path. It surly is a crisis measure not to be undertaken lightly as it is an admission of massive failure of monetary policy, you will likely see hyperinflation before you lose any 0's.

Anonymous said...

In 1945 and for about 5 years afterwards Gold had no value unless you could get it to Switzerland as I was in Europe for 4 years after the War "ended" and from 1951 to 1960. It was hard to buy things of value wiith Gold but with folding Gold Seal FED notes you could do business. Money and trade was is 5 gallon tins of food stuffs, cloth, shoes and other things.

My family has been collecting Gold bullion since 1725 and the only time we sold any during the War of the Rebellion in 1861 and bought tons of green backs discounted as there was no was a buunch of Cotton Farmers was going to defeat a population of tinkers. We have not bought Gold since w could get Eagles for $275 an ounce.

Gold is not an investment but moves here and there without incumberance other than weight.

You are not going to $450 from a coin dealer for your coin as he is both too few and does not have the "Legal Tender". There is no right of Mintage for your gold.

We buy Gold because we have a stream of income and are not in debt. We have lost money in the Gold we have saved every year since we started to save it and that is over 200 years. 100 ounces of Gold today cannot buy anythin near what it could buy 50 years ago or 100 years ago. The land is gone, the farms are gone, the starting of a business is gone. With all the money in the World here in the USA I would not know where to get a good bit and brace, saw, ax, shovel, house, tree, lumber, clothes. Who needs cars when there are no mechanics and the dealers can just replace parts.

Havung landed in France in August of 1944 I cannot see the deal. Take the giant slum, NYC, just where and how does the food get in and from where. There only people in the "light" food business are the Koreans who grow it oon truck farms up state New York and truck it into their family markets in the city. Only the Koreans have small farms with round beans (1,600 varieties of Soy Bean) and can make Soy Milk, Tofu, Kuroa(?) Whey Soap and God knows what else. They dry it and grind it into a fine powder using wind or water mills. They buy the defated soy grain for their Tofu and make the Whey from scratch from the whole bean so the powder can be added to food.

It is good you have your Gold but it is not an investement. The trick is how to use it when the time comes, and it is coming soon. This is not 1845, 1935, or even 1955. When the inflation started in 1958 big time being a manufacturer or retailer or a farmer was a loser. You hvae to leave as a cheat, cheating inestors of every stripe of the FIAT un every scam. Friends, that is the truth. The Gold Bugs are just selling there Gold letters and have no battle map. This time it will be a battle for life and investment survival.

Anonymous said...

If you're going to make your opinions public, try using proper grammar and check your spelling!

Anonymous said...

I can take the poor grammar and bad spelling in stride if there is important content. Its the unintelligble rambling that blew me away.

Anonymous said...

Look at it this way:

When the general economy is good and you can get a good return on your investment, the dollar is worth more than gold, which simply sits there looking pretty.

But when the economy turns sour, and you cannot make a decent return in terms of VALUE, gold becomes the safe store of value it allways has.

This explains why gold oscillates in value in spite of the fact that the Dollar continues to be devalued through credit expansion.

It is in the nature of the current economy and the perception of it, since it is people backing there opinions with money that determines which way the price will move.

So, fundamentals don't matter right away, and the powers that be can push matters too far, as they allways do.

Eventually reality asserts itself in the market. In my view the reality is that the excessive credit creation machine has gone too far- creating what Mises and Rohtbard would term malinvestment- excessive productive capacity relative to real demand for goods.

Under such circumstances, companies fail, debts are not paid, defaults occur and because of our pyramided central bank credit, the money supply starts to shrink, causing even more defaults.

As the real economy falters and people become scared, they run to tangible investments like Gold.

We're just starting to see Gold assert itself, based on the actual expansion of the money supply in Dollars and every other fiat currency, Gold is extremely undervalued, based on the 1980 price, or even half of that value of approximately $800.

In the past few years Gold has started to act as an attractive store of value for a small number of investors. It has hardly become the talk on the street, as people have turned to real estate and other speculative investments, not understanding that these are primarilly inflationary, and not a creation of value.

This is starting to change. The economy is faltering thanks to the fundamentals, it's only a matter of time before Gold reasserts itself and attracts more followers. The people who have been selling gold are in trouble because the price continues to rise. Even if they are the Central Bankers themselves with an unlimited supply of paper, there is only a finite amount of Gold.

So to reiterate there are times when gold is not worth holding, and times when it is. My opinion is that it is time to buy as much as you can and store it safely, and if you can afford to, leverage the purchase of even more through futures, options on futures or owning miners.

Realize that compared with the captialization of Microsoft alone, the Gold market is much smaller. When more investors run to gold, the price will explode upwards.

Anonymous said...

Gold has begun in earnest its function as the ultimate currency,
it's going much higher than in the last bull market.
very good article

Anonymous said...

@Davenport: You're absolutely right about cash trying to buy tools as simple as a good bit and brace. I've found a few at garage sales and antique stores, but ebay is where I managed to gradually acquire decent carbon steel knives, froe, double handles draw knives, spokeshaves, and even some never used Tina grafting knives. Took more time than money and in a crisis we'll have no time to spend even with cash and/or gold.


Anonymous said...

A number of conservative analysts who represent mainstream financial institutions are now calling for the price of gold to reach $500 US by years end..... that is very telling.

When major institutions advocate buying gold after waging an all out war against it for roughly 25 years, who knows how high it will go?

Anonymous said...

Daveport's article is dead-on. But it deserves to be summarized.

Gold is a store, an inter-generational store, of wealth. As an investment it may well buy less goods and services from decade to decade. And sometimes it isnt the medium of exhange of choice, as in postwar Europe. And certain articles of value can hardly be had at any price. Quality-built tools for example. Or skilled labor. How will you get your car repaired if all a 'mechanic' can do is swap out an old part for a new one? Where are the new ones to come from in the context of the dollar becoming progressively worthless? And what then is the value of a car that cant be fixed?

Some small farmering operations seem sustainable in the context of a collapse in the dollar with soybeans being an extremely flexible crop. But altogether people who are just buying the metal or reading market letters aren't doing nearly enough to ensure their own success which in the near future could well be a matter of physical survival.

Anonymous said...

I am not in the least bit sorry for my bad typing and grammar but I type as fast as I can and get it over with. Being over 80 years of age, I can talk from experience where you just talk. Go try to buy a farm with Gold near Flemington, New Jersey of Meridian, New York...and live off it. Good luck. In New Jersey where there were truck farms that brought by horse and wagon food, today you have nothing including railraods. You do not go to the warehouses on what was once called Flatbush and Atlantic Avenue in Kings County Brooklyn and buy a 50 pound sack of Long Island spuds. I do not know what they even sell there or if it is there but if anything it is grass cuttings.

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