Robert Sczech

Is Black Gold Worth More than Real Gold?

If you value oil, you should hold gold. The hidden assumption behind the thesis of Mike Conion is that we will always be able to buy oil with Dollars. That is an assumption which may be proven wrong one day. Gold on the other hand, is always accepted as payment for oil (Alan Greenspan).

The main difference between gold and oil is that oil is a depleting asset, while gold is not being used, gold is being accumulated. While the total amount of oil in the ground is decreasing every day, the above ground accumulated gold is increasing every day (more than 160,000 tons of gold are presently above ground). If no replacement for oil is found, this means that oil will outperform gold during the next 50 years.

If oil starts getting scarce, food will become scarce as well. For that reason, the recommendation is, start accumulating food. Storing large amounts of food on your property is not as dangerous as storing large amounts of oil in your backyard.

Like food, oil can not be stored indefinitely. It will eventually evaporate and change its chemical composition.

Metals Manipulation - Or Simply Deleveraging?

I do not mind market manipulations as long as prices are kept down. I would object against a market manipulation only if the price of gold would go up, that is, supply of gold being withdrawn.

Seriously, who would object if the government forced the price of bread lower?

The Case for Gold Today

Diversifying 3% to 5% of all savings into precious metals (including gold) is a low risk proposition. Mutual funds charge routinely more than 1% in management fees per year, so diversifying 5% into precious metals is the equivalent of giving up 3 years of management fees to financial institutions. Any allocation of less than 10% into precious metals is not significant if the present financial system is going to survive. On the other hand, if the financial system is going to fail, than an allocation of 10% (or less) into precious metals may not be enough in order to preserve the purchasing power of your savings.

Common Misconceptions About the Fed and Gold

There is this old claim that the Fed is a private institution which enslaves the American people via the issue of debt money. This claim although true, misses the main point. The Fed is only a legal construct designed to obfuscate the truth. Monetary policy is set by the US government and money is issued (via the treasury bonds) by the US Treasury. The main purpose of fiat money is to simplify the collection of taxes. In order to keep taxes steady and growing, the US government needs a tool to control the economy. That tool is the Fed and its manipulation of short term interest rates.

In order to truly understand our monetary system, we need to look at it from the point of view of generating a stream of taxes to support congress and the general government. These tax collections have been rising steadily over the years, regardless of how the economy is doing. It is this rising percentage of the GDP which is collected by the governments which is the actual problem - not the fact that the Fed is officially a private institution. Although the Fed is a private institution, no Fed chairman will ever act against the will of congress or the US president.

The Gold-Oil Ratio Approaches All-time Lows

Engineer: Storing energy in a car battery means that one can recover a high percentage (80% to 90%) of that energy stored in the battery. Gold is not a store of energy since the energy expended in producing that gold can not be easily recovered. It takes energy to grind a stone into sand. Once the sand is produced, there is no easy way to recover the energy dissipated.

Having said that, I agree with you that gold is a highly desirable metal. The main usage of gold is jewelery (wedding rings). In other words, we need gold in order to attract a woman. We need oil in order to give more than 6 thousand million humans the privilege to participate in the unfolding drama on this beautiful planet located in a tiny spot of the universe. Without oil, the human population would be much smaller.

The Gold-Oil Ratio Approaches All-time Lows

User 163397: gold is fairly priced if not expensive, but oil is still cheap.

The Gold-Oil Ratio Approaches All-time Lows

Industrial civilization can thrive without gold, but it can not survive without oil. Already a stagnating oil production can cause significant problems as we experience now. While gold is being mined for hoarding (all the gold ever mined is still around), oil is being burned within a few weeks after being produced. Worse still, once burned, oil can not be recovered, that is, oil is a nonrenewable resource.

I think the declining gold/oil ratio is just a reflection of a global revaluation process. Energy used to be extremely cheap, in the future all energy will be very expensive. My bet is that the gold/oil ratio will decline further towards a long term equilibrium value somewhere between 1 and 3.

Why the Discrepancy Between Oil and Gold?

The price of gold is not a reflection of supply and demand (there is a huge oversupply of mined gold above ground). In fact, the price of gold is a barometer for the health of the monetary system. A rising price of gold indicates trouble. For that reason, central banks do manage the price of gold within certain limits in order to keep the confidence into the present system. In such a system, buying gold means acquiring insurance against the unthinkable event.

Gold is money (according to J.P Morgan). No form of money can store wealth. Oil is wealth. More generally, wealth is any form of assets which allow survival now and in the future. (If you can not attract a woman, you have no future.) Although it is true that gold can be exchanged into real wealth, that should not tempt us to think that gold is wealth. If nobody is going to share food with you, you are going to perish regardless of how much gold you own. The acceptability of gold in the market depends on the marginal surplus of real wealth. If the farmer is starving, he will not share with you his remaining food. Ownership of gold does not protect against the risk of drowning and starving to death. For that reason gold can not be wealth.

Regarding the gold/oil ratio, that ratio will continue to go down. People who do not believe that do not understand the consequences of peaking energy production. For the next 20 years, oil will be a better investment than gold. The oil market can not be controlled since it is too large. The gold market being very small has and continues to be controlled. Gold will continue to underperform inflation. Nevertheless, we can not afford not to hold gold.

Why Gold is Likely to Keep Moving Higher

"THE RULE OF SUPPLY AND DEMAND" does not explain anything since another basic principle of economics says SUPPLY = DEMAND. Things which are not produced will not be demanded and things which are not demanded will not be produced (for long).

Why Gold is Likely to Keep Moving Higher

Regarding gold and inflation: In 1913, one ounce of gold sold for less than $20. A few weeks ago, one ounce of gold sold for $1,000 - a price increase by a factor of 50. According to the federal inflation calculator (google it) at the Federal Reserve Bank in Minneapolis, goods and services worth $20 in 1913 would cost $418.79 in 2007. There is no better proof that gold is an excellent inflation hedge. Even if gold fell down to $400 per ounce (very unlikely), it would still cost as much (in inflation adjusted Dollars) as it did cost in 1913.

One further reason to hold gold: It is the only widely recognized asset which can not be taxed away by either collapse of the currency, inflation or direct taxation. Possession of gold was historically synonymous with the ability to escape government terror.

Finally, to say that gold is worthless because it is useless is nonsense. In truth, gold is valuable because it can not be used. Everything which can be used, will be used, and, as the result of that usage, it will wear out and deplete, that is, it becomes worthless because of that usage. Gold is precisely valuable because it can not be used up. It is this almost religious property of gold which explains its popularity in jewelry making.

Finally, it requires a supernova in order to create gold. In other words, all gold on earth comes from outside the solar system as our sun is too young and too small in order to be a supernova.