THE BLOG

Gold Not Money: Bling's the Thing

05/01/2009 05:12 am ET | Updated May 25, 2011

Nobody knows whether the current Washington bailout plans with banks, General Motors and real estate will work quickly, at all or at what cost to the U.S. currency.

This is why China and others are talking up a new reserve currency, or basket of the biggest such as the Euro, Yen, US dollar and a few others of significance.

The future is always a matter of opinion, as is political competency, which is why it's a good idea to own a little gold.

That may be a leap to most people, but the facts are that protecting yourself against the vagaries of markets, leaders and capitalist running dogs has never been more important or perilous. Best advice I've come across is to divide your asset mix into four classes: real estate, stocks, bonds and gold (probably bullion or coins not stocks).

It's apparent that more people in the world are turning to gold for several reasons:

1. The U.S. dollar as a reserve currency is on the endangered species list and as it wobbles the only safety play is gold.

2. Capitalism as we have known it recently is also coming to its logical conclusion and the uncertainty of what, when, how and who has led the millions of younger entrants to Asia's middle class to buy a little bling.

3. Chicken Littles: these are the survivalists who think the world as we know it is coming to its logical conclusion. They counsel the purchase of gold coins, bottled water, a generator, canned goods, a garden and guns. (dailyreckoning.com)

4. Legacy gold bugs whose beliefs are rooted in libertarianism and paranoia about gold price manipulations.

5. Other gold bugs include those who will never believe in paper currency and want a return to "fiat" money, backed by gold as was the case until a handful of decades ago.

My favorite lately is an excerpt from a gold bug manifesto out of Australia: "After gold's breathtaking $38 surge in 15 minutes, there is much renewed interest in the Ancient Metal of Kings. The Federal Reserve, which is clearly being run by lunatics, publicly announced it is going to create over a trillion dollars out of thin air to monetize US debt. This degree of pure monetary inflation is utterly unprecedented, Gold soared because it remains the best asset to own in inflationary times. Inflation is an immoral stealth tax levied on everyone."

I like gold

Of course, Canada is a big gold producing nation, and I'm on a gold mine board, so I'm a bigger fan of the shiny stuff than most. America's Fort Knox is the biggest hoard of the shiny stuff in the world, representing the biggest government reserves globally. The U.S. is also a significant gold producing country and none of its reserves have been sold despite the removal of the gold standard for currencies in the 1970s.

Today, there may be more reason than ever to believe in gold, including the five reasons above which continue to drive prices upwards. And buyers are not looney-tunes living in armed treehouses. Here are estimates as to prices in 2009 and 2010 by a sprinkling of financial institutions:

Citi Group - gold will hit US$2,000 an ounce by end of 2009

Bank of America, Merrill Lynch - average US$1,000 an ounce in 2009, up from a previous estimated average for the year of US$875 an ounce. In 2010, US$1,050 an ounce

UBS US$1,000 an ounce average in 2009

Morgan Stanley also US$1,000 an ounce in 2009

On the other hand, an Indian website called Sife points out that gold will only reach its peak price in 1980 in real terms when it hits US$2,500 an ounce. (India, mostly due to cultural reasons and in jewelry, has the most gold of any nation on earth by the way.)

Diane Francis blogs at Financial Post.

YOU MAY LIKE