ddtuttle

The End of Gold, Part Two

I have been studying gold for only about a year. I have purchase quite a bit, so that colors my arguments.
Gold has a split personality: commodity and currency of last resort. As a simple commodity, people buy gold and make jewelry out of it. Gold has very little industrial utility, especially at these prices.
However, gold is also a "monetary instrument", that is it is a repository of value. This is why most of of it is held in vaults as bullion.

When times are good, gold behaves like the commodity, because the need for a safe haven is not there: paper money is trusted and works just fine. The gold sits in the vaults collecting dust not doing much of anything.

But when times are bad enough that people fear all the paper currencies value, then there is a rush to gold. There is so little gold available for investment purposes, that any significant rush would send the price through the roof. If every body in the world tried to put 5% of their portfolio into gold, that would require many times the gold extant in the world today. Since most of it is held by central banks, there would a many fold shortfall for retail investors. Not to mention existing investors would very little incentive to sell their stake.

At the moment the dollar is enjoying a safe haven status: the world still thinks our paper money is actually worth something. However, the other currencies in the world, sterling euro etc. are falling dramatically. Gold has hit record after record in the last few months denominated in these other currencies. We are surprisingly close to a moment when, if the dollar falters, there is nothing left but gold.

Gold is in what you call an anti-bubble, because the world hasn't given up on paper yet. At the same time many investors need cash, and gold is one of the only things that has gone up in the last 8 years. Desparate investors are selling stakes to fend off creditors, redemptions and to stay liquid.

I hold a lot more dollars than gold, mostly in real estate, so I'm not happy about gold going through the roof.