Thursday, December 18, 2008

Gold - it just sits there

Gold is the only currency not able to be debased by human decree. In fact, humans made it the world's currency of last resort through centuries of trial and error. Since every single fiat/paper currency in history has eventually gone extinct due to the whims and errors of politicians and bankers, people in the know have learned to trust gold to store their wealth in bad/hard times.

Every major world government is now trying to debase their currency (woops I mean "stimulate the economy"). Japan, not to be outdone by the new U.S. rate of "somewhere between zero and zero-point-two-five," slashed its central bank-set rate to 0.1%. China is allowing its currency to devalue and other governments around the world are aggressively slashing interest rates, including the Swiss. Everyone wants to have the most worthless currency in order to prosper. This is the paradox of a global monetary system built on a foundation of quicksand.

Meanwhile, gold just lays around looking all shiny and shit. It doesn't pay any interest for the average Joe on the street - you have to be a fancy banker or real rich Wall Street dude to get involved in receiving interest payments on your gold. Yet somehow gold manages to have bull markets periodically. Why is this?

Paper promises are revocable/modifiable at will when made by governments and corporations, often without recourse for the average person on the street when the promises are broken. Think of gift cards or warranties at retail outlets that have gone under. What are they worth once the company declares bankruptcy and closes its doors? When you hold $100 in a coffee can on top of your refrigerator, you are holding a paper promise whose value can fluctuate radically depending on the state of confidence the world has in that promise. When times are good and confidence runs high, there is little concern for what could go wrong. Times are no longer good and confidence is no longer high, nor should it be.

Our central bank in the United States has devalued its paper promises by roughly 98% since 1913. Putting money under the mattress is simply not a good idea for long-term investing. Gold, on the other hand, has increased in nominal price (i.e. relative to paper U.S. dollar promises) by more than 40 times since 1913. This is without dividends or growth potential. This is based solely on currency value destruction!

The big, manic leg of the gold bull market has not yet begun but it is coming to a country near you soon. I believe that $2000/ounce for gold is a very conservative estimate of its potential to be reached within the next 5 years and a price of $5000/ounce is quite feasible. Meanwhile, the stock market is guaranteed to do poorly relative to gold and carries considerable risk related to the companies invested in and the counterparties involved in the transactions required to buy stocks.

Trust is a valuable commodity and when it breaks down, gold is where those in the know turn for safety. Getting a less than 1% return on a depreciating asset (e.g., paper dollars) when that depreciating asset can be swapped for a real non-depreciating asset (i.e. gold) with the potential for substantial gains in value over the next five years is one of the best trades you can make. While the paper economy burns as we head into Great Depression II, gold will shine brighter than ever.

As a matter of fact, once the Dow to gold ratio returns to near one, which it will, one ounce of gold will equal or nearly equal the price of the Dow Jones Industrial average. At this point, which we will probably reach within the next 5 years, the long-term gains of physical gold since 1913 will be much higher than those of general stocks. That's right: by the year 2013, the roughly 100 year return on the Dow Jones will be lower than gold buried in the backyard!

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