The Vet

Winmill: Don't Be Surprised By $2,400/oz Gold

This comment "gold does not have a good record of making people money" is repeated endlessly but when queried you will always find that whoever makes it always bases their assertion on a starting date of 21st Jan 1980 at a price of $850 USD an ounce. That was 9 years after Richard Nixon completely cut the link of the world's monetary system to gold something that had never happened in prior recorded history.

Sure that was a bull market spike that lasted but a few days and gold then went into retreat, but to take a single data point and use that to make the assertion that "gold does not have a good record of making people money" is simply distorting history. Almost every asset class available can be shown to have experienced "blow off tops" and then retreated later if you cherry pick the time frame.

When the world's money was closely linked to gold, as it always was for all but a few brief periods prior to 1971 there was no way that the "price" of gold measured in the currency it directly supported could appreciate significantly. It is mathematically impossible! Now that link has gone, it is truly "different this time".

Thoughts About the Current Bear Market Among Junior Miners

Great insight, but of course this failure for the banks and the markets to commit to any risk is the same reason that commodities, metals, food and oil are in such demand right now. In the dot com days and before, paper projects and paper investments were short term, quick return and had a degree of certainty... until they failed!

Now commodities are high, costs are high and the time, expenditure and risk involved in getting a new mine off the ground is even higher than before, right at the time that the traditional risk taker, the small investor is feeling the pinch.

The need to get starter projects going so that the world will have adequate supply of commodities has never been greater, but investors time horizons have never been shorter, so where will it end.

IMO the solution lies with the few majors who are doing well with their high cash flows and diminishing reserves. They have to step up and start aquiring and investing in the junior sector. Only then will we get the investor interest returning. The majors are not doing themselves an favours with their current "just in time" mentality, as they well know that new projects always take longer and cost more the longer they delay commencement...

Once they start to lose production as mines become depleted, they will lose their income and the currency of their high stock price regardless of the current spot price of their production. Gold at $5000 an ounce is of no help if production has dropped to a pittance.

Get Out of Commodities - Barron's

What a lot of wooly logic... Hydrogen to solve all of our problems? And just how do you get free hydrogen?

Answer.. There are lots of ways but they all require energy in some form or another and as no process is 100% efficient. The energy required to make extract the hydrogen is always going to be greater than the energy utilized when it is burnt for fuel. Innovation may give us better processes to generate and store hydrogen but there is no perpetual motion machine and no free lunch.

Wind power as the saviour? Give us a break! Sure up to 20% of the total electric power consumed could come from wind power, but to depend on any more puts the whole grid at risk. The wind doesn't blow all the time anywhere. So you need another back up for those windless days, and nights... Days, maybe some solar would cover some of the deficit but on those cold windless nights when you are sitting freezing in the dark you will get to realise that depending on too much "alternative" energy which by definition is erratic in supply might not be such a great idea. You might find yourself wishing for a nice big nuclear plant churning out hundreds of megaWatts of baseload power which would keep the wheels of industry and the home "fires" toasty warm.

Besides, all of the alternatives are very "dilute" sources of power. Wind farms have to cover thousands of acres in order to capture a reasonable amount of energy as does solar. Speading these around helps to cover for local weather variations in wind, cload cover etc. but just how do you think this dispersed energy gets to where it is needed.. The electricity gid has be be much larger, cover longer distances and have a large amount of redundency built in in order to use this alternative power effectively. Funny thing, but that needs metals; lots of metal especially copper (form windings, wires and transformers), steel (for transmission towers), silver (for switch gear) etc.

This rosy future where all our energy comes from everlasting 24 hour sunshine and the perennially cloudless sky, with steady breezes that never vary and which blow everywhere power is consumed at a rate to cover the load regardless of time of day or the curent weather, and where no metals, oil, gas, uranium or any other "commodity" is ever needed or used, is a fairy tale straight from the pollyannas of the "green revolution". THINK!

Four-Digit Gold Sets a New World Order

"Charlie the counterfeiter adds an extra demand for goods and services without making any contribution to the production of goods and services."

We don't need Charlie, to create that extra money, the banks do that quite easily and legally on their own through the mechanism of fractional reserve lending.

The theory is that that excess credit which is created by fractional reserve lending and circulated into the community is ultimately removed when the loan is repayed to the lending institution.

However where the asset backing that loan loses value and the borrower walks away, the loan isn't repaid and the "excess" credit previously created is still out there and it cannot be removed.

When the borrower walks away, he is in effect like Charlie the counterfeiter, he passed on the benefit of the "created cash" to the builder of the house but ultimately produces nothing of lasting value to add to the pool of goods. True the house he once owned may still exist but it is worth only a fraction of the outstanding loan until such times as housing prices recover. Until that loss is either repaid or written off then the effect is to increase the money supply by the diference between the current value and the original purchase price.

Gold Is Just a Brick ('Active Value Investing' Book Excerpt)

What the author completely ignores is the very real and ever present counterparty risk of all paper instruments. He touches on it in respect to gold shares and ETF type instruments in gold, but ignores it for his favourite paper instruments, bonds, TIPs etc.

It is true that strong governments will try to support their "official" paper in a numerical sense when it suits them, but they also actively devalue the base fiat unit of account when times get tough. You might be able to redeem the face number of fiat units but you never get back the real value invested regardless of interest payments.

For recent examples look at Argentina and Russia, historically, check out Germany in the first half of the 20th century, and Rome a couple of thousand years ago. The US government may look to be reliable now, but so did Rome and hundreds of other governments at various times in history. The only constant historical fact is that all of them have eventually failed and their fiat currency failed with them. Gold on the other hand has always retained value.

Closer to home, Americans who bought and held Continentals and paper denominated that way certainly would have wished they had bought gold instead at the end of the war...