ANTIESTABLISHMENTARIAN

Finance, Fuel Prices, Economics, Markets

Is Gold a Safe Haven in All Storms?

As a long time investor in precious metals, I have learned a bit about them, and have decided to pass it on. Quite naturally in these troubled times there is much talk, as well as much advertising, about gold as “protection.” Many claim that is protection against uncertain investment climates. But is Gold a Safe Haven in All Storms?

I can give a very short answer to that. NO! Gold in no way protects assets, as is often advertised, for reasons that should be obvious. Gold as a safe haven can do one thing only, and that is preserve the value of money when paper money is converted into gold. Gold and Silver are the world’s oldest universal forms of money by far. The value of gold has remained remarkably stable over periods of thousands of years. What makes for their very stable and trusted value is their acute scarcity and the inability to increase their quantity by appreciable amounts. Therefore, as a form of money, they cannot be deflated.

It has been calculated that about 98% of all gold ever mined still exists. While gold mining every year adds a tiny fraction to the existing supply (about ½%) this mainly offsets what is lost and/or consumed in industry. An interesting bit of trivia is that the largest gold mines in the world, by far, are the sewer systems of the world’s largest cities which recover far more gold than is mined from the earth. This is measured in tons!

Gold provides very good protection against inflation of fiat currencies. That the price of gold can fluctuate wildly results from the value of paper money fluctuating. So one way to look at it is that the value of gold remains the same while its price in paper money is what changes. Many people see the constantly changing price of gold and are terrified by this. They wouldn’t be if they understood the difference between value and price. The gold/dollar overlay chart below illustrates.

golddollar

In 1978 I purchased 10 gold Krugerands at a price of $286 each. Today they’re priced at nearly $1,000 each. Would I make a killing if I sold them today? Not at all, since when we adjust the price for inflation, the value is amazingly nearly the same.

Does gold price exactly mirror the dollar value? No, not exactly since inflation is a very hard thing to measure and we all have different perceptions of it. And then there are periods when the gold/dollar price gets out of whack, just as the prices of everything does from time to time. Yet with gold these periods are infrequent and usually very short. It always quickly reverts to a true valuation since it is THE most watched “commodity” in the world. It is not really a commodity, but that is the market in which it usually trades. It is more properly known as a “monetary metal” as is silver.

The primary reason why people buy gold is as inflation protection. In periods of deflation, the price falls. When governments lie about the rate of inflation, as the US does, the price of gold rises anyway. There are too many people who can interpret what the Fed is doing.

Is it true that governments manipulate the price? Yes, but their efforts are generally ineffectual over time. The gold markets exist world wide and are beyond the ability of governments to effectively control to a significant degree. Central banks can dump gold holdings in inflationary times to push the price down, but it invariably climbs right back up again.

Is gold good for long or short term investments? Depending on the amount, there can be significant costs associated with buying, holding  and selling gold. Short term trading in physical gold is rarely done by investors. Purchases made in effort to protect against inflation generally involve a medium term investment, say 3 to 5 years, in which case the basic cost gets defrayed over years so it becomes insignificant as compared with security trades.

And no, gold doesn’t earn interest since it is no one else’s liability and there is no risk of default.

From what governments around the world are doing and propose to do, it is clear that we now face a huge risk of inflation. Gold may be something you want to consider.

February 11, 2009 Posted by | precious metals | , , | Leave a comment