Friday, July 3, 2009

Gold is Money and Nothing Else

The title of this post is actually a quote from Mr. JP Morgan in the early 1900s during a Congressional hearing in the United States. Big league bankstas know the role of Gold in the system. Gold is the asset base upon which paper schemes and leverage are constructed. Gold is not a way to get rich, but it is savings and it is money.

When paper schemes and scams collapse, he/she who holds the Gold gets to start and/or participate in the new scheme because he/she has the money! Speculating in currencies is fine if it is one's interest, but Gold speculation is simply that. There are many other inflation hedges besides Gold. But to preserve wealth in US Dollars or any other paper fiat currency is risky over the longer term.

Most people want to multiply their wealth, not preserve it. But for those who understand the nature of the current economic crisis and the nature of the typical cyclical government responses (yes, there are even more still ahead) to combat these unstoppable economic forces, owning at least a little physical Gold makes sense. If the return on the stock market, real estate and commodities is negative over the next year and the government is about to get desperate to once again debase the currency by any means necessary, where is a safe place to store your money?

This is why the inflation versus deflation debate is so spirited and so important to those trying to preserve and/or grow their wealth. Gold is a hedge. It is a fair (not great) inflation hedge and a good deflation hedge and it provides catastrophe insurance as well. I would never advise anyone to put all their money in Gold but I also think it's foolish at this point in the economic cycle (i.e. a Kondratieff Winter or secular credit contraction) not to have at least 5% of one's liquid net worth in physical Gold held outside the system.

This is not doom and gloom, this is being smart and being prepared. If you end up not needing the insurance, you'll probably make an almost risk free profit on the price of Gold and you will avoid the inevitable further losses coming to other asset classes. Yes, most deflationists prefer fiat cash over Gold, but not me. This is because I also think a coordinated regional or global response to this crisis could knock the US Dollar down a peg and might dethrone it. If I am wrong, I will have missed a few percent of yield. If I am right I will have avoided losing 30-70% of my savings to chase a few percent of yield.

I don't claim to know exactly what's going to happen to the US Dollar over the next decade but I do know that the Dow to Gold ratio will reach 2 at a minimum. I am trading the bear market to make money and patiently waiting to put all of my speculative capital into Gold stocks from the long side once I think the bear market is almost over. But Gold is my hedge and my boring savings account in case I'm not as good a speculator as I'd like to think I've become. I also cannot time bureaucratic decree as I am not privy to any insider information, so how can I know exactly when a big apparatchik-decreed currency event is coming when it will almost certainly be announced out of the blue on a random day known only to insiders?

To end, I'll leave you with a quote I disagree with but the first two sentences of it are what many central bankstas and governments in effect tell their people (all the while holding more Gold than anyone):

Gold is not necessary. I have no interest in [G]old. We will build a solid state, without an ounce of [G]old behind it. Anyone who sells above the set prices, let him be marched off to a concentration camp. That's the bastion of money. - Adolf Hitler

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