Thursday, December 11, 2008

Gold versus paper - can you handle it?

The problem with understanding the difference between gold and paper money is the same problem as discovering the Matrix before critical mass. Everyone is asleep and prefers to be asleep. Paper money is comfortable, darn it, and why should we think about bad things? Gold is seen as a negative thing when it is absolutely the quintessential embodiment of what money should be.

People are now making jokes about bailouts. Let's just give money to everyone! Just print more money! Where's my bailout? Bernanke can just drop money from Helicopters!

History has shown that every single fiat currency in history has returned to its intrinsic value - zero. A fiat currency is one backed by nothing but promises. You must understand that every paper promise made on behalf of our government has consequences. Every time a paper promise is made, an I.O.U. is created in the form of a Treasury Bill, Note, or Bond. We have to pay interest on that obligation. Now, some would argue that we can just print more money to pay the interest and that is an absolutely valid argument that gets to the heart of the problem.

Printing paper money or creating digital money in a computer requires NO significant effort. Do you know how much effort is required to find/mine an ounce or two of gold? If infinite money can be created with little or no effort, ya think maybe the ability to create money out of thin air might be abused by those in power?

How can you save and plan for the future in this environment? If you think you need a million dollars to retire, this is probably based on what one million dollars means today, not in the future. The U.S. dollar has been devalued by roughly 98% since the Federal Reserve was given a no-bid contract to print money for the U.S. in 1913. This means that the purchasing power of one million dollars in 1913 is now equivalent to $20,000.

Why does this system exist? For what purpose? Inflation benefits those closest to the printing press, who can use the freshly printed money to purchase assets or pursue other schemes before the general price level increases for everyone, thus those nearest the printing press can make money off the inflation, while the rest of us see our savings dwindle in purchasing power.

Forget conspiracy theories, this is about looking out for you and your family. Our currency is strong right now because we are in a deflationary bust. Once this ends in the next 1-3 years, a serious currency crisis is likely at the rate we are printing money. If you think losing 3% purchasing power per year is no big deal, how about 50% in a few weeks?

Gold cannot be created out of thin air. Gold is hoarded by EVERY CENTRAL BANK IN THE WORLD, yet individuals who hoard gold are considered kooky. Why is that? If gold is such a barbarous relic, why do central banks in every major world economy hold TONS of it? Why are the governments of China, Russia, Iran and Saudi Arabia buying so much physical gold right now while the jag-offs on CNBC laugh or roll their eyes every time gold is mentioned? Did I mention that the U.S. and other governments have stopped production of their gold coins for retail investors with no valid reason given? Think these governments might know something you don't?

Time to grow up and understand where we are in history. Cycles and human folly repeat over and over. The coming times will be ugly and you can absolutely protect yourself and your family by buying gold and gold stocks. If this weren't true, how do you explain the almost sine wave nature of the dow-to-gold ratio chart since the Federal Reserve took over our money supply duties (see below, chart stolen from Is this sine wave now suddenly going to end because Paulson and Bernanke are the smartest bureaucrats in history? Gimme a break, yo.

Buy gold and buy gold stocks. Get out of general stocks. Don't trust banks with too much money as most are bankrupt and running on fumes and government promises of a bailout.

Yes, this message is bearish. No, things are not going to get better in 2009 because Obama, a member of the Council on Foreign Relations, has been elected. Do his cabinet member choices seem like fresh new blood that has never been part of the Washington machine and are opposed to the current establishment? Hee hee, I just peed myself laughing.

I promise once the dow-to-gold ratio gets back to one (whether at dow 10,000, dow 1,000 or somewhere in-between) that I will turn bullish on general stocks. I promise. Until then, bull is a short term word for bear market bounce unless we're talking about gold or gold stocks.

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