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ikkyu2 (99.52)

The Aura of Aurum

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November 29, 2007 – Comments (3)

Wrote the following as a reply to a pitch for GLD, the StreetTracks gold bullion ETF.

Demand for gold is not created simply by population growth. If 100 million severely impoverished people are born in sub-Saharan Africa, world gold demand will not change at all. Those people have 0 demand for gold; their demands, that they will labor to satisfy, are for clean water and enough protein so that they do not immediately die. Likewise the percentage of people worldwide who demand gold is small - but it is increasing as the global middle class increases. A lot of people are speaking about demand for gold in India - where it is used as part of weddings in a way that is almost religious (i.e. irrational), and in China, where it is being hoarded by an emerging middle class.


As a kid I read all the 'gold bug' newsletters - C.V. Myers, anyone? - and read a lot about how gold was a great inflation hedge. But historically it has not been a great inflation hedge, because supplies and demand over time have been artificially controlled. (Russia's dumping on the market of nearly all the ex-U.S.S.R.'s gold reserves in the 90's and early 00's kept the price far lower than it otherwise would have been.)

In long terms - decades or centuries, - I think the unmodified noun "inflation" should be banned from the discussion. Currency calculators are a joke; not even a troy tonne of gold could buy you a dose of penicillin in 1907 if you had pneumonia. In shorter terms it is useful to talk about the dollar's decline "against" something, or inflation "measured against" some other thing. For the last few decades global demand for gold was centered in the U.S. and therefore decline in the dollar against other currencies was not wholly reflected in the gold price. It is because this situation may be changing - *along with a decline in the dollar* - that I think gold is now a decent short term inflation hedge. (If the decline in the dollar doesn't continue, and I think that's possible though unlikely, gold may not be as good an investment in U.S. dollar terms.)

I will try an experiment in this last paragraph of this blog entry: I will mention Ron Paul, to see if maybe that will make certain CAPS players feel like they don't need to post an irrelevant comment about him.  :D 

3 Comments – Post Your Own

#1) On November 29, 2007 at 7:40 PM, DemonDoug (98.84) wrote:

I don't quite know what your last paragraph is about, but I'm definitely a Paul supporter, and a supporter of his views on currency, where he believes currency should be backed by some asset (not just gold - maybe silver).

I'm not a big believer in gold as an investment, either, for many of the reasons you state.  And I agree that it is a great short-term hedge against dollar devaluation.  Personally, I believe the best hedge is oil.  Oil oil oil.  And the best way to invest in gold is to find a miner that gets beaten up if gold has a pullback.

Finally, silver is much more undervalued v. gold right now, and it has much more utility (and we're using a lot more of it v. gold).  You could even argue for copper or other base metals that are starting to become more difficult to pull out of the ground.

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#2) On December 01, 2007 at 7:32 AM, abitare (99.42) wrote:

Concur, with DemonDoug. Oil and silver better then gold, they have more commercial uses. You are late to the "gold" party. 

We are heading into a recession. Gold is a commodity. Commodities fall in recessions.

Is there a war threat? Yes. Is there a threat to the dollar from central banks refusing to buy more dollars? Yes. Can this drive the dollar down? Yes, and it has.

The case for gold at $1,000 is the case for war and central bank selling of dollars. The case for gold at $500 is tight-money by the FED and recession

If we go to war with Iran and the FED inflates, there will be no more balance. Gold will hit $1,000, and then go much higher.

Again, to know Ron Paul is like Ron Paul. There is no other reasonable cannidate.  

 

Nine minutes of instruction:

http://www.youtube.com/watch?v=XaxdUPNYj2s

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#3) On December 01, 2007 at 1:37 PM, ikkyu2 (99.52) wrote:

Currency will never again be backed by an asset in our lifetimes.  That would entail a world economic rollover and decades of war.

 

Ron Paul is a screaming lunatic demagogue.  He belongs in an asylum, which may not rule him out for the Capitol or White House. 

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