Gold Is Still a Good Choice

I find it difficult to believe that, despite the utter corruption that has become increasingly apparent as a result of this economic crisis inherent in the banking and Federal Reserve systems and the contempt of these institutions for the long-term value of the US dollar, there still seem to be many supporters of fiat-based monetary regimes. Perhaps even more difficult to believe is the vitriol with which some proponents of this system criticize those who choose to invest in gold, let alone advocate a return to the gold standard. And yet, the gold bugs have it right. They have always had it right. Why? Because throughout history, gold has always maintained fundamental value.

The anti-gold crowd will say: “wait a minute, gold is just a bunch of shiny metal, with no intrinsic value. If you were stuck on a deserted island with a pile of gold it would be worthless.” This example, in the extreme sense is true. In such a case gold would be worthless, but so would paper fiat money, promissory notes, stocks, bonds, credit default swaps (these seem pretty much worthless anywhere these days) or more or less any other store of value except commodities that are fundamentally necessary to human existence such as food, water, clothing and shelter. (Actually Federal Reserve notes might be useful for cooking fires.) The point is “value” as a concept derives from supply and demand, which itself derives from human want and need and therefore human existence and competition within human society itself. (To some extent this phenomenon also exists for other forms of life.) Without life, value does not exist. And likewise without human society currency or mediums of exchange have no value. Therefore in some existential sense we could argue that nothing has fundamental value. But similar to the way mathematicians will tell you there are different types of infinity, there are different types of worthlessness. And paper money is far more worthless than gold could ever be.

Gold, throughout history, across cultures, and during the rise and fall of various nations and empires has always maintained a fundamental value. To be sure, that value has fluctuated, in terms of how many real goods (or fake dollars) it could buy, but humans have always recognized that this shiny, yellow metal was something rare and therefore something special. I could take an ounce of gold today, and go 500 or 1000 years in the past or 1000 years in the future and assuming I could find humans, I am confident I could get something for my gold. Collector’s value aside, how many of you are willing to bet you could do so with the dollar? (Zimbabwe or American.) The point is this: fiat money derives its power from governments and governments fail. Gold on the other hand derives its value from some fundamental aspect of human psychology (it turns out parrots seem to like shiny things too). So as long as there are humans (or parrots) gold will have value. In a sense gold is the monetary equivalent of “I think therefore I am.” “We think therefore gold is valuable.” The same cannot be said for the kindling the treasury prints up.

Now what a lot of you may want to know is: will gold go up or down in the near term? To which I reply: I really don’t care. Call me a Jim Rogers wannabe, but short-term trades really don’t interest me. That’s the province of gamblers, financial engineers, inside traders and people with friends in government. I am interested in fundamentals, and the fundamentals for gold look good: 1) The shortage of credit and investment means there is relatively less exploration and development of mining; 2) India and China are growing (India in population, China in per capita income). Their jewelry markets will grow and a substantial amount of world gold consumption goes to jewelry and 3) Mark my words: there is another storm on the horizon and when it comes, Financial Crisis 2.0 will be even worse. When inflation is factored in we could see multi-thousand dollar (USD) gold. (I don’t even want to think about what it would be in Zimbabwe Dollars.)

At the end of the day, you can write me off as just another gold bug, but I can say something with confidence about gold bugs: if the US economy turns around, our gold will still have value. And if the US economy goes into the tank we will be laughing all the way to the bank. Oh, wait; we won’t need to go to the bank because we will be holding a medium of exchange that has intrinsic value in itself, regardless of who prints the money. Either way, we never, ever have to lose sleep worrying that our beautiful shiny yellow metal will pull a LTCM, an Enron, a Bear, an AIG, a Lehman, a GM, or a Zimbabwe Dollar on us. It may go up, it may go down, but gold will always be gold.

Disclosure: Long gold and Japanese Yen.

Comments

[sjgold:]

exactly! unfortunately the herd will not and cannot be definition anticipate the inflation and currency debasement that is already here.

Take a trip to any grocery store and see what the dollar actually buys these days....not much, now assume that your dollar buys 1/2 as much groceries as today. THAT is on it's way and much quicker (summer?) than anyone can imagine now.

The herd (the fed included) could not perceive the subprime crisis (is it "contained" ben?), nor financial meltdown until it was too late. why would recognizing serious and sickening inflation be any different. Picture going to the store and paying $5 for a can of soda, those with eyes to see already see it here.

Apr 19 08:57 AM

[capt Brian:]

I must be a simpleton. I like to keep things simple because it does not take much to confuse me. Like charts, stargazing, and gurus who always have a long verbal attack, and they leave me breathless, confused, and not knowing what to do. So I do nothing, and miss everything. (Is that the way you have been feeling lately?)
Well, here is your answer. I refer to a comment I made a while back:
Put one nice ounce of pure gold (a nice double eagle would do nice), and one nice pretty ounce of silver, ( lIke a silver eagle) in one of your palms, clink them together...[beginning to grin?], now put the equivalant value in USD's in the other palm, and you should have around $1000 in value in each hand. Now, both of those are mine, and I tell you you may keep either the gold and silver in one hand, or the dollars in your other hand as a gift from me. Which would you choose, the dollars or the worthless scrap metal in the other?
THERE.. you have answered your question of what to do with your hard earned savings, keep it cash, or go find a little precious metal.

Don't you hate simplicity, takes all the fun out of telling people why you were wrong. DO BOTH.... but don't get nutso about anything.

Happy retirement!

PS. I am buying PM's, now keying on platinum, and numismatics [because due to folks needing cash they are selling coins and numismatic value has dropped somewhat, check some old redbook prices with current prices, values have not gone up that much, so your numismatics will rise better during the recovery [if it happens] If you buy platinum, and we are okay financially, platinum will be needed in industry, and if we are not okay, it rivals gold in being a precious metal, so you possibly could win both ways with platinum, and not with gold and silver. (I am holding and accumulating all three, when I can get them decently)

Capt Brian

Apr 19 09:41 AM

[yellowhoard:]

Well stated Jesse! I'm going to add you to my list.

Apr 19 09:42 AM

[Mad Hedge F...:]

It should certainly be a part of any doversified portfolio. “There is room for bulls and bears, but pigs get slaughtered,” said Peter Munk, the legendary founder and CEO of Barrick Gold, the world’s largest gold producer. This is his admonition to worshipers of the barbaric relic hoping for a quick super spike to $2,000 or $5,000 an ounce. Since 2003 gold has tripled from $300 to $1,000, outperforming every asset class in every currency, and he has no problem with it backing and filling here in a long term uptrend. The fundamentals look great, as the world is running out of the yellow metal. The industry used to be run by demand from the Indian wedding season. The current economic stress has made the country a net exporter of gold for the first time. Global jewelry demand is at a 20 year low. With the help of satellites, the world is pretty well mapped out, so there will be no more surprise Californias or Klondikes found. The only untapped reserves are in the Andes at 13,000 feet, or in countries too dangerous to visit. The cost of extraction has also doubled in ten years to $400/ounce, driven by labor, fuel, trucks, and environmental mitigation. Gold will only go down when the US government turns off its printing presses. With record stimulus packages in place, there is a fat chance of that happening in this lifetime. Ultimately, the price of gold is a barometer of fear, which will not be in short supply in the new era we are facing.

Apr 19 11:21 AM

[blog.kerdos...:]

“It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” - Warren Buffett

"short-term trades really don’t interest me. That’s the province of gamblers, financial engineers, inside traders and people with friends in government." - Jesse Veverka

Are you serious ?

Apr 19 11:33 AM

[Ishortyou:]

I think Jesse got a point.

Apr 19 02:44 PM

[FDNY RET:]

Just hate to go around with a barrel of water on my back, just to be right when I land on that desert Island.

Gotta be portable, recognizable and outside the reach of Politicians.
Count your options.

Apr 19 02:52 PM

[Doc 224899:]

Let's see if $855 is a support level for gold bullion.

Remember, not long ago $855 was the all-time record for gold bullion, a price that only existed for a few moments in a chaotic market over 20 years ago.

Awhile after 9-11 gold was down briefly to ~ $270, below the costs of production.

If $855 holds as a support in the next few weeks, we may see a 3-fold upside for gold as inflation kicks in and as green mania drives up the costs of everything that could cost half as much if it just didn't have to be so green.

Apr 19 03:33 PM

[Mike10613:]

Gold is a good investment with quanitiive easing devaluing all a currencies, but as one comment has already said;diversifying your investments is a good idea too. Silver saved the Chinese government from the depression of the 1930's and it looks attractive now.

Apr 19 06:42 PM

[5142152-337:]

Thanks for the article. Posters are getting it right, too!

Apr 19 07:32 PM

[mv1001:]

People who just can't figure out why gold (and silver) have "intrinsic" value make me laugh, especially when they fail to see that paper money, by their criteria, also has no intrinsic value.

But to really understand the intrinsic value of gold, try this simple experiment: Surprise your wife or girlfriend with a gift of a nice piece of gold jewelry, and watch her reaction. You will probably be very pleasantly rewarded with behavior that tends, under natural conditions, to propagate your DNA into the next generation. You may repeat this experiment as often as your funding allows, to collect a good statistical sample.

For a control experiment, try giving her jewelry made of, say, aluminum or copper or iron. Compare and contrast.

Apr 19 09:51 PM

[History Buf...:]

Kerdos

Buffett. Isn't he the guy who lost about $15 billion last year?

What exactly is YOUR point?


On Apr 19 11:33 AM blog.kerdos.com wrote:

> “It gets dug out of the ground in Africa, or someplace. Then we melt
> it down, dig another hole, bury it again and pay people to stand
> around guarding it. It has no utility. Anyone watching from Mars
> would be scratching their head.” - Warren Buffett
>
> "short-term trades really don’t interest me. That’s the province
> of gamblers, financial engineers, inside traders and people with
> friends in government." - Jesse Veverka
>
> Are you serious ?

Apr 20 10:40 AM