It's the End Of the World As We Know It and I Own Gold 95 comments
Tim Iacono
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There seems to be a good deal of confusion these days about the reasons why individuals should own gold.
Who owns gold?
While there's the "momentum crowd" - those who will buy anything that is going up or sell short anything that is going down - these folks are more traders than owners and don't really factor into the "ownership" discussion.
This leaves basically two groups of gold owners - those who fear a financial catastrophe and those who fear the debasement of paper money.
However you look at it, there's a lot of fear associated with owning gold.
It's the End of the World as We Know It and I Own Gold
The financial doomsayers seem to believe that the metal is some sort of insurance against the wheels falling off of the global financial system (or, perhaps, the outbreak of another major war ... or both), in which case, all your other investments are likely to go down the tube.
They often say, "Be careful what you wish for", making the incorrect assumption that everyone invests as they are told by Money Magazine with an 80 percent allocation for stocks (which, lately, seem to want to go down without any help from catastrophes).
The thinking goes that a ten or fifteen percent investment allocation for gold bullion might be of assistance in some way if things go horribly wrong - as it was immediately after World War II when no one trusted any country's paper money - and that, before providing this much-needed assistance, the whole thought of having it there at-the-ready might make you sleep better at night.
While this may be true, it's also true that, if you buy gold for this reason, you should probably load up on shotgun shells and 45 caliber rounds as well, since, under these extreme conditions, they might fetch an equal value in barter with the added benefit of being eminently more useful in protecting your other valuables.
As for the collapse of the financial system, some would argue that over the last ten days the global financial system is already collapsing around us, yet the yellow metal is worth only a little more than it was before the collapse began - hardly enough to make any difference in any post-collapse existence, though that could surely change very quickly.
While anything is possible, it's hard to imagine this kind of extreme scenario playing out anytime in the near future, but, if it does, you will surely be better off owning gold coins than U.S. Treasury bills.
"Muddle-through & Monetization"
The other type of gold owner sees the outlook for the world as being a little less dire with fewer banks, businesses, and governments failing and with much less loss of life.
If the doomsayers are once again disappointed and the world continues to revolve around its axis which becomes no more or less tilted, there is another very powerful argument to own gold - the debasement of paper money that will, for a while at least, forestall the financial apocalypse.
If we're lucky, we'll avoid the financial apocalypse all together.
This report by the Citigroup Mining and Metals Group is a good example of this line of thinking and more investors who currently do not count precious metals as an important part of their holdings should really take a cue from their work (here's the report(.pdf)).
They argue that owning gold can also be viewed as insurance against the government printing too much money in their herculean effort to somehow keep the wheels from falling off and the earth rotating about its axis.
Of all the possible outcomes from this point forward in the ongoing credit crisis, muddling through and monetizing debt would have to be the preferred outcome over Citigroup's other scenario - "Gloom & Doom" (see "It's the End of the World as We Know It" above).
Some might say that we're already well into the "Muddle-through & Monetization" scenario, having avoided the "Gloom & Doom" for years now, after the stock market bubble burst at the turn of the century.
Evidence of such is provided by the fact that, from 2002 to 2007, the gold price increased an average of 20.5 percent a year. Project this forward to the end of 2013 and you get a "Gloom & Doom" gold price of over $2,500 an ounce and nobody has to die.
Either way, gold owners come out ahead
Six or seven years into a gold bull market where prices have gone up for each and every one of those years (is there any other asset that can make that claim?), most people still don't understand why they should own gold. It's not because it's insurance against everything else tumbling down around you and, despite what traders think, it's not because the price has been going up.
The real reason to own gold is that governments are in the process of debasing their currencies in order to alleviate the pain of souring economies that were built on a fundamentally flawed principal - that more easy money can solve the problems created by prior easy money.
It won't.
In the long run, the only thing that easy money really does is make hard money more valuable when said hard money is measured using the easy money.
Gold doesn't have to go "parabolic" to reach $2,500 an ounce - a number often cited in the "Gloom & Doom" scenarios.
All gold has to do to reach $2,500 an ounce is to do in the next six years what it has done over the last six years.
The real reason to own gold is because the U.S. government and other governments around the world have been and will continue to try to remedy all known and perceived economic and financial market ills with their printing presses.
My guess is that somehow they'll be successful - at least for a while.
And just in case they're not, stocking up on bullets isn't a bad idea.
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This article has 95 comments:
GOLD, SILVER AND, YES, BULLETS ARE THE ONLY SAFE BUYS NOW!
Quick comment on this clueless statement:
"@900 an ounce everyone is taking their grandmother's jewlery to the smelters, increasing the supply,"
Ummm....that doesn't increase the supply, Mr Genius. Mining gold increases the supply. I smell public schooling...
Then, buy bullion. Gold is compact, very, very, very easy to hide, unless you're a billionaire.
Then, if you have something left, buy miners.
If you don't put up any signs like "Food & Gold Here", you will be OK.
This is not the apocalypse.
I am in planning stages for a new buggy-whip factory should the need arise. I'll make quintillions!!
Got horse?
I don't know how far the collapse will take us. How could I know? But I'm trying to be prepared for the coming events which surely includes an incredible inflation. In fact, we already have inflation--duh.
It has retained value through thousands of bankruptcies over the last 150 years. Like they say about the Stock Markets, hold them long enough and they outshine every other investment but that only refers to the Indexes not to individual stocks.
So I'm filling in the bunker hole now. Later I will check the expiration date on my passport, sign up for a foreign language class or two, and invest in the foreign currencies I will need to make a fresh start. After all, the only reason I am alive today is because my ancestors fled Europe at exactly the right time.
I will fund this preparation with soon-to-be worthless dollars. Perhaps a couple hundred dollars in collector coins could be usefult to bribe immigration officials, but speaking multiple languages and posessing business skills have always been more useful to immigrants.
And of course, completely ignoring Tim's column, they again go straight to a Mad Max world. You can get kicked out of your home and be homeless even w/o mayhem raging in the streets, guys. If you buy some significant amount of gold you're protected against hyperinflation. It won't defend your home from zombies for you. But it might mean the difference between destitution and getting by.
The gold hoarders of early 20th century Europe mostly had their gold taken away from them by someone who hoarded ammo. Therefore, lead is more valuable than gold! Whoever runs out of ammo last gets the gold! Everyone else goes to the camps!
It's much better to be prepared to escape a deteriorating situation while you still can. A suitcase full of gold will only get stolen - you can't spend it on necessities. If you're worried about national decline look into Swiss banks, currency diversification, country diversification, foreign languages, and work skills that are sellable anywhere.
These goldbug survivalist fantasies are fun!
Now to Gold,I don't play in any markets,but I study history & follow every thing going on in all sectors of the world,& it is a fact that Gold is money,& has been & will never go to zero,like so many Fiat money has gone before! Nixon servered all ties to the Gold Standard,setting up the Central & World Banks to work together,to Manipulate Gold & Silver,but they are running out of bullets,as more Nations are aquireing Gold to there Reserves,that tells me Gold is a place where Nations Protect them selfs, as many sane people are doing right now!
Gold ,Silver,& Lead Bullets are all good to trade for Services, 90% Silver Coins have been used to trade for fresh fruit & Vegs in small towns where I live all Summer,so is Silver money? Yes!
man, the masses are pissed but they don't even know, accurately, why
thanks for the humor folks
If you want to be able to escape when it all falls apart, the past is your guide. A suitcase full of metal will only get you robbed - perhaps even by the immigration officials if you make it that far!
Certainly can't argue with making value plays, though debating what constitutes 'value' is what makes the markets go.
I myself think that the exponentially growing debt and shaky financial sector's bailout will push China and Japan toward dumping the dollar. The bigger the bailout grows (and you KNOW it will grow beyond $700 Billion) the more likely that is to happen. When it does, the gold price should go up as the dollar drops.
My value play was to buy a sizeable GLD call position based on gold when it was at $770 a few weeks ago. I am currently a shade under doubling up and my calls won't expire until March.
I think that there is a good chance the price will head higher between now and then. Believe me, I won't hesitate to take profits if the price runs up above the $1000 mark significantly.
I waited several months in cash to establish that position and now that I'm well ahead I can wait some more to see how things play out. It doesn't hurt that it's the "gold" season in India and harvest time in asia (peasants sell crops and buy gold to 'store' their work).
If I were just getting in now, I wouldn't be taking anywhere near as large a position because the risk would be that much higher. So in a sense, I somewhat agree with shortgold and somewhat disagree. Time will tell which way the price actually goes.
As for the have/don't have gold debate, I'd rather show up a bedraggled refugee with gold than one without gold. If I have to move to another country and start over I'd rather not start on the bottom rung of the ladder.
Actually a lot of people HAVE left the country. Notably Jim Rogers.
Diamonds. Even more value per volume though less liquid. Easier to hide if you need to flee for your life. They don't set off metal detectors either. Harder to value as well. Some training needed to grade them accurately enough to not get ripped off.
I don't doubt gold will go higher. If I did I'd have sold my options already at 30% higher than current price.
I am ahead for the year by quite a bit. My gold calls are an attempt to swing for the fences and cash in a really big one (hopefully without losing anything in the process). So far, so good.
Still, who knows what the future brings? shortgold might be right. He feels strongly about his opinion, we differ in ours. I can live with that. He's risking his money, I'm risking mine, you're risking yours. The only way to tell is to put your money at risk and see what happens.
Good luck to us all.
Even if you had a 1 oz coin you could pound it flat enough with a hammer to cut out a smaller amount. "Preformed" jewelry is just easier in that respect. (and yes, I bought my jewelry at spot, not retail)
And Wal-Mart is trying to start up its own banking operation. Soon Wal-Mart currency will span the globe and replace the dollar.
US Gov't will lose billions on the bailout. If there was profit to be made a private party would be willing to take the same deal the gov't is offering. No private party offers, therefore not much chance to profit.
Plus...whatever has the gov't run profitably? The Post Office? Ha!
The RTC estimated bailout in the 80s at $20 Billion. Wound up COSTING $160 Billion and they got those properties for next to nothing.
$700 Billion is just the camel's nose under the tent flap. Soon we will have the entire camel inside the tent.
If gold wasn't worth the paper it's printed on, why is most of it still sitting in the vaults of governments and central banks at huge costs to store and protect?
Sure. Gold price might go down but I doubt any gov't will sell any meaningful amount from reserves. Like I said, I'm swinging for the fences this time, so I'm willing to stick my neck out a bit to see what happens.
I think the bailout has already (mostly) been priced into equities. End of Q3 is gov't fiscal year. Oversized deficits can drive gold up. Extent of actual losses in financial can be bigger than thought. Lots of ways that people can be surprised to my advantage by unexpected news.
Thanks for your thoughts. I'll keep them in mind.
What we all are argueing here is what is the value of it. We know it aint zero, at present its about 900. We just have no idea what it will be tomorrow. The main point however is that it WONT BE ZERO!!!!!
gimme two
Use Perth MINT, and/or goldmoney to keep some gold out of the country.
If you need to eat, sell gold and use the dollars you get to buy your food. The argument that you can't eat gold is baseless, you can't eat greenback also, you can eat meat or pizza. Use goldmoney for that if you need more convenience.
If the bailout causes hyper-inflation, stupid people trying to kill gold bugs would be sick and die..
BTW, I'm not a gold bug, but I know how I should keep myself away from fiat currency when hyperinflation arrives.
If deflation happens keep cash, buy bonds, but I don't see how deflation may happen. Gold + silver would be the second best bet in that situation.
Do not forget to keep at least 6 month's salary as emergency cash...gold selling may take some time unless you use goldmoney.
shortgold. No offense, but saying that "we're all screwed" if we get to the point where we have to trade gold for food isn't much of a plan for dealing with the remote possibility.
I'm not saying I expect that to happen. I certainly don't hope it happens, but if it DOES happen I will have thought about it and have a plan ready to deal with it. If it doesn't happen that's great. I have a plan for that case too.
I've taken an important lesson from the Boy Scouts; Be Prepared.
Check out my prior posts. There's one from several days back that gives prices for a median house and gold in 1970, 2000, and 2008.
As best I can recall from memory:
1970 median house $17,000
1970 gold: $38
1970 house priced in gold: 447+ oz
2000 median house: $119,000
2000 gold: $279
2000 house in gold: 426+ oz
2008 median house: $219,000
2008 gold: $800 (I rounded down a bit)
2008 house in gold: 273+ oz
I don't know about you, but something I can buy in 1970, bury in the back yard, and dig up 30 years later that can buy the same house isn't what I would call a "piss-poor investment".
The entire point of holding gold is that its relative value to other tangible stuff is reasonably constant. You can't say that for paper money, which is readily seen in the above pricing for a median house in dollars.
Go to the Bureau of Labor Statistics website and use the government's own inflation calculator and you will see that you need over $91,000 today to buy what you could get for $17,000 in 1970. OR you could use 61% of the gold today to do the same.
Calling people 'gold bugs' doesn't make much of a point nor does it help to sway them to change their mind to your position.
goldshort and I may not agree, but we can exchange our thoughts without resorting to name-calling. That way we both might learn something that could change our minds on the topic.
In the end, what you think of me is not my concern. I have however read your comments and thought about them a bit.
You make a good point on oil prices but I don't really have any way to store large quantities of physical oil, even when it's at $150/bbl, nor can I refine it myself for personal use. Soooo, it sort of fails the long term "store of value" test for me. I'll stick with gold for the time being. Thanks for your thoughts.
Can you prove the US has any Gold at all??
Go to Asia and see what they think of Gld. It is still used as a method of exchange, so even if the worst were to occur, think Zimbabwe, there has to be a functioning currency to regain economic traction. Guess what that will be??
regards.
Go to the grocery store, link by link on their digital scales, you will be able to purchase what you need.
Gold in Oz. plus gold links will allow for most purchases anywhere, You will have to use Gold Bars to buy a house unless the "twenties" in Germany are revisited, then oz. might suffice.
You said that gold is intrinsically valuable, but I'm not sure that's completely accurate today.
Intrinsic value means concrete usefulness. For example, firewood is intrinsically valuable as a heat source, regardless of price. Food is intrinsically valuable for sustinence, regardless of price. Prices can rise and fall depending on supply and demand, while the intrinsic value stays the same. If the market price for bicycles rises, for example, the utility of bicycles as a transportation/recreat... devices stays the same as when prices were lower. A bicycle does not become more or less useful just because the price changed. It doesn't transform into, say, a motorcycle just because prices rise or fashion changes. It is just as useful the day after the price increase as it was the day before.
Gold's intrinsic value is its usefulness in semiconductor circuits and specific industrial applications. Recent price fluctuations do nothing to change the concrete usefulness of the element itself. The element itself remains unchanged. I have omitted jewelry and investing from this list because these are not concrete, intrinsic uses. Gold's value for jewelry and investing is based on human decisions regarding fashion and on human decisions regarding economic conditions. Gold's value for jewelry depends on human fashion, as evidenced by the 80-year trend of platinum becoming more desirable and more expensive for jewelry than gold. There are lots of industrial elements & compounds that are more rare than gold yet sell for less. Gold's value for investing is that, like any other commodity, it can protect against anticipated inflationary spikes by rising in price inverse to inflation, minus holding costs and risk of physical loss. If the inflationary expectations of investors decrease, the price of gold will decrease and owners will lose the price difference, plus suffer the opportunity cost of foregone yields in other investments. The case could also be made that gold investing is also a form a fashion. How many articles did you read about buying gold in 1999 vs. 2008?
Gold's market price is a combination of intrinsic value and non-intrinsic value. It's safe to say that the vast majority of today's prices are non-intrinsic, as industrial usage has been a drop in the bucket compared to rising investment demand and rising supply (mining) activity.
The conclusion is that while gold, nickel, steel, copper, etc. will always have intrinsic value to fall back upon and will therefore never be worthless, the price of these commodities could fall to near intrinsic value (i.e. 1997 prices) if human fashion or economic externalities go a certain way. Small investors holding physical gold face additional risks due to illiquidity, high transaction / coin manufacturing costs, and the risk of burglary.
You might point out that fiat money's value is 100% non-intrinsic, and you would be right! Money's value is the value that everybody decides to assign to it. However, at today's prices, I estimate that gold is at least 90% non-intrinsic. Plus, gold prices are far more volatile than the dollar because of gold's inability to earn interest, holding costs (insurance, vaults, guards, transport), lower liquidity, higher transaction costs, etc. If inflation reaches 8% next year and my cash savings account only earns 4%, I'm out 4% plus taxes on the interest, a total 5% loss. If, on the other hand, inflation expectations fade and gold becomes less fashionable as an investment, my gold coins could lose more than half of their value next year, plus the losses from liquidation at a dealer. Plus, although it seems inconsequential in the context of such a loss, I lose the opportunity to earn interest on my wealth.
Thus, gold in this market no longer serves the purpose of risk reduction or wealth preservation, despite having these expectations built into 90% of the price. That sounds riskier to me than buying stocks!
When the Japanese invaded our country and later surrendered, my Mum told me they had to burn all the banana notes printed for circulation. Hmm..Wish my mum was smart enough to use it to buy some gold then. so cheap. less than US35 dollars.
Those living in Zimbawee must have wished they owned some Gold
before their currency "exploded" with zeros. Worthless.
I am old fashion and not very smart I bought Gold at a high price. I am now down by 10 to 15 percent. Its okay I will wait. I know it cost quite alot to get one oz of Gold from the ground so it wont go to zero. I know the Central Banks likes to horde Gold and they are very reluctant to sell. I like to do what they do, not what they tell me to do.
Our dollar earn less than I percent interest kept in a Bank. ( Must be a
very safe one otherwise go bust ). Our inflation is running 6 to 6.5 percent and I am desperate. My 'money' is losing its value so fast.
My friend is very smart, went to buy investment instruments called 'Structured notes' paying 5 plus percent. Capital protected. Lehman Brothers collapsed. Did not read the fine print. He is going to loose everything.
Glad I am not very smart, bought Gold. Can pass to my children, they to their children and to their children's children. Hmm.. Wonder how much one oz of Gold will be worth then? Wonder how much our 'money' will be worth if inflation continue to run at 6 percent per annum. No wonder most children hate their parents for bringing them into this world. Know what, they will love you till your dying days if you keep some Gold for them. The Gold you keep for them is the best insurance policy you can give them like what the US army give its special forces on a mission. Gold is Gold in every country no matter what configuration your future money will become. Love God, appreciate Gold. It give me true freedom.
JC.
At the end of the world, many people like to do what makes them happy. Thus taking my cue for the end of the world from the end of the song "its the end of the world and we know it... and I feel FINE!"
I think you underestimate the 'intrinsic' value of gold, inasmuch as how much it costs to pull it from the ground. It takes an enormous amount of labor or labor substitutes (electricity from oil, coal, etc.) If mines could produce gold at less than $100/oz, I'd believe you; but $100/oz production costs are a pipe dream in the current environment.
"Plus, gold prices are far more volatile than the dollar because of gold's inability to earn interest, holding costs (insurance, vaults, guards, transport), lower liquidity, higher transaction costs, etc."
You can lend out gold, you can use it as collateral for a loan. Paper money does not eschew the need for insurance. Paper money does not earn interest-- in fact, according to the behavior of inflation, actual paper money has NEGATIVE interest, no different than physical gold. Interest bearing money isn't money, it is a debt. You can't pay for lunch with a gold coin any more than you can pay for lunch with a CD or Treasury Bond.
"Plus, although it seems inconsequential in the context of such a loss, I lose the opportunity to earn interest on my wealth."
I believe this the fallacy in a nutshell-- you don't buy gold to gain wealth, you buy gold to maintain buying power and value. Stop thinking dollar centric, and start looking in a broader context of actual, dare I say it, real exchange value.
The high average extraction price for gold is a result of the frenzied exploitation of marginally economical deposits. Gold mines that would not be economical to operate at normal prices are opening around the world in response to high prices. This frenzy to produce supply is in response to a frenzied demand - not from industry (intrinsic value users) but from investment speculators (non-intrinsic value users). Investors' demand for gold is driven by momentum (fashion) and inflationary expectations (externalities). The history of gold prices suggest that when these short-term factors turn .... look out below (see early 80's)!
My point is that if you are buying or owning gold to (a) survive a socioeconomic meltdown, (b) have a greater chance of preserving wealth, or (c) reduce your investment risk profile, at these prices the investment will fail on all counts because...
(1) if a socioeconomic meltdown accually happened (e.g. Iraq), spending or owning gold would be too dangerous anyway (best to get out),
(2) gold prices (in terms of anything, not just dollars) are highly volatile and respond dramatically to changes in fashion or externalities, and
(3) investment risk is not reduced by buying volatile investments at historic peaks that are based mostly on fashion and externalities (e.g. tech stocks).
Gold's run-up in recent years is the direct result of the negative real interest rates you mention. This is a historical anomaly, and we will eventually see reversion to the mean spread between inflation and interest rates. These low rates have both driven down the value of the dollar and driven up the value of gold and real estate. When that trend inevitably reverses, expect investors to flee back towards cash. You mention that gold can be used as loan collateral - could this be how the big investors are earning income with gold? Expect these positions to be violently unwound if anyone gets even a tingling sense that the price is about to drop.
Gold is worth what people say it's worth, and that changes from day to day.
Gold is good also.
These equity and debt bugs are puzzling to me.
Cant eat gold? So what?
You cant bury a steak in your back yard and dig it up when you need to to trade for anything you need--like bullets or cigarettes, bribes, etc.
Stock bullets? Yep that makes sense, you can do both.
Gold isn't insurance as most insurance expires worthless. Gold is a store of value--like cash--only better.
if you are a debt bug---and have all of your assets stored in treauries--I hope you are taking into account that you are paying the government for the privelege of loaning it money.
You are guaranteed to lose money by buying US bonds in todays market.
I have no doubt that the secular bull market in commodities will eventually come to a close--in about 15 years.
Why do we have low rates?
Is it because we are in a very low inflationary period and it is required to keep prices relatively stable?
or is it because we have a federal reserve that is too afraid to take its medicine and pay the price of the tech bubble, then the housing bubble, and eventually the commodity bubble?
If you believe the goverments reports about inflation and jobs then you may be inclined to the former. If you beleive that the government systematically lies to us about jobs, growth, and inflation for their own agenda--then you may be inclined to the latter view.
If the latter view is correct, then we are likely headed into a period of much higher inflation for a sustained period of time.
If you believe the "crisis is largely contained" Fed and Treasury...then it is feasible that we are merely witnessing an anomoly that will revert to the mean shortly.
The government would love for you to believe that Gold is a horrible investment, and that you should hold dollars and treasuries.
Who do you believe? I expect gold to violently explode to the upside as people get a tingling sense that dollars are guaranteed to lose much more value than they are used to losing.
Kinda depends on whom you trust.
And I'm not even a conspiracy buff...just a middle class guy with a two kids that i want to send to college.
Personally I think there are other materials far more useful than gold - platinum for example has far more utility, and is also widely accepted as an alternative to gold as a medium of exchange.
Are you looking at it to make money as an investment because of it's volatility, or as a store of wealth or purchasing power.. in any event, it's one of the 10 "eggs" in my basket... I think they call it diversification.
But why o why has no one mentioned drugs ? No, not just booze and tobacco, those can be easily had. I am talking morphine pills, speed, diabetes medication etc, etc. These will very quickly become the most valued things out there. It will be like having 10,000 life insurance policies. Want to live ? pay the piper. Want to feed that Opioid addiction , need to relieve the pain of the end times ? pay the piper.
Then I'll have all the gold, food and whores a man could ask for.
One would think individual investors would have learned after being successively burnt on tech stocks, real estate, and even oil! It was said that each of these "can't go down" and often reasons were cited.
-exponential tech earnings growth.
-exponential technology growth.
-real estate hadn't declined nationwide since the 1930's.
-oil's technical charts pointed at $200 by now.
The reason people are piling into PM's: they've gone up exponentially in the past and we might have 6% inflation next year.
Wonder what post-PM bubble will be?
Why would they want to lower the gold being held? They get paid a % of holdings. It doesn't cost them any more to hold the gold at $1/oz than at $10,000/oz.
Take a look at today's price/volume action in GLD.
finance.yahoo.com/q/bc...=
Total shares traded: Over 40 million.
Shares traded during the huge 5 minute long drop during the last half hour of trading: About 32 million.
Hmmmm.... over 75% of volume for the whole day made in a five minute window where prices dropped like a rock from the day's high.
Nah. Couldn't be price capping. Must have just been an instantaneous change in herd mentality to 'dump' shares.
Can you say "Plunge Protection Team"? Sure....I knew ya could.