What $1000+ Gold Means To You
The dollar price of gold is above $1000 and new all-time highs are likely. Maybe it will go quite a bit higher.
OK, so what? Does this mean that wedding bands get more expensive or something?
Most people probably look at gold as some minor metal -- not even in the class of major metals, like copper, aluminum or iron. Maybe you could group it with vanadium, molybdenum and rhodium. It might be good for a little gamble, but it is hardly an investment.
If you look more closely at gold, you discover that there is hardly any compelling investment thesis at all. Molybdenum, for example, is used in steel alloys. Maybe places like India and China will use a lot of steel alloy to build all kinds of things. Since it is not so easy to open a new moly mine, there could be a supply/demand imbalance, driving up the price of moly.
There is never a supply/demand imbalance for gold. About 85% of all the gold ever mined in all of history still exists, as jewelry and stockpiles of bullion. Certainly no shortage of supply. Demand for gold -- for genuine industrial purposes, such as electronics -- amounts to about 2% of world production per year, and 0.04% of the existing supply, (I consider use in dentistry to be jewelry-like.) Not much demand there either. In fact, it appears that gold is among the most useless things on the planet.
If something is "going up," but there is no fundamental reason for its rise, then it appears to be a "bubble." People are just buying it because ... it's going up. Like tulip bulbs or something. Supposedly, there is a "superstition" that drives people to buy gold during times of economic difficulty. Tulip Bulbs of Doom?
These are the typical litany of excuses offered by people who don't own gold. These are not the reasons people buy gold. They are, rather, a catalog of confusion from people who don't understand why other people would own gold.
If you talk to people who actually buy gold -- a lot of it -- they will tell a completely different story. Their reasons can be summed up in the words of J.P. Morgan many years ago:
"Gold is money. That's it."
All right, "gold is money." What does that mean?
The principal characteristic of ideal money is that it is stable in value. Gold is the closest available approximation of this ideal. In other words, gold is money because it is stable in value.
All serious gold investors will tell you some variation of this basic observation.
This "moneyness" of gold is recognized throughout the world. You could jump out of an airplane and parachute into any major or minor city in the world -- from New York to Djibouti, Brazzaville to Chiang Mai -- and you would probably land within walking distance of someone who will buy your gold near the world market price.
Thus, gold is the supranational money of mankind, because it is stable in value.
One reason it is stable in value is that it has no significant industrial use -- and thus no supply/demand issues that could cause a change in value. Thus, gold's apparent "uselessness" is a necessary condition for it to be useful as money.
You can think of gold as a currency -- just like the dollar, euro or yen. However, unlike those floating, government-manipulated fiat currencies, gold is stable in value.
From this you can understand why all major nations used a gold standard system, for basically the entire history of western capitalism, until 1971.
The "dollar price of gold" is the exchange rate between dollars and gold. The "euro price of gold" is the exchange rate between euros and gold.
When it takes more dollars to buy gold, it doesn't mean that gold is "going up." Gold is stable in value. It means that the dollar is going down in value.
If you have dollar commitments, such as bank accounts, loans, bonds, employment contracts, pensions, etc. -- or assets denominated in dollars such as equities or property -- and the value of the dollar is going down, that means that the real values of all those assets are also going down.
Melting away like ice cream on a hot summer's day.
When the value of a currency declines, usually all real asset values decline alongside. So, if you just stay even -- avoid losing value -- that's pretty good. While the value of gold remains stable, its purchasing power can rise because the value of everything else is falling.
If it takes more and more dollars to buy an ounce of gold, you shouldn't be surprised if it takes more and more dollars to buy all kinds of things. This is generally known as "inflation." However, this process is quite slow, and it can take many years -- even decades -- for prices to fully reflect the decline in currency value. Also, the process can be masked by other processes which might induce falling prices, such as recession and debt liquidation.
Thus, although the dollar declines in value, the decline in purchasing power of the dollar is not immediately evident. This is why people stick with their dollars for years, as they lose 80% or 90% of their value, before they catch on to what's going on.
It's possible that the dollar will lose quite a lot of value over the next 4-7 years. This would be evident in a "rising gold price." At $10,000 per oz. of gold, the dollar would be worth only 10% of its value today. It would take ten times as many dollars to buy an ounce of gold.
That is about the point at which I think most mainstream people will finally wake up to what's going on. Unfortunately for them, by that point, they're already dead. It's too late.
Now do you understand why people own gold?
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Nathan you are over thinking it man,
Just remember this, when you go to the bank in the next 4 months and one day they aren't open and there's a sign on the door that the FDIC has no more money to pay out for claims and your regular ATM has disappeared then you'll get it.
Until then don't worry yourself - just go out and party till you fell better like everyone else.
It sounds like you are proving his point- if FDIC is closing banks all over the nation, that means America's currency will be less stable, causing it to decline in value... and making the price of gold go even higher.
It means more people are cashing out !!!!!!!!
>When it takes more dollars to buy gold, it doesn't mean that
> gold is "going up." Gold is stable in value. It means that the
> dollar is going down in value.
It wasn't until the "Bush Boom" that I realized this, once I started considering what effects the conservative's disasterous economic policies would have on America.
In my mind, I likened it to relativity, and the speed of light. In relativity, things are measured relative to the speed of light. And likewise, in currency economics... all currencies are measured relative to the price of gold.
That's why during years when conservatives are in charge, and maxxing out America's credit card with their loose fiscal policies, the price of gold will spike. Then, once the adults in the Democratic party get in charge, the price of gold goes down, since the value and stability of the USD will increase once again.
Having said that, I still was too worried to put money into gold. Wish I had- not even I could have predicted how insanely terrible conservatives would manage the economy during the "Bush Boom".
Nathan, maybe you can help me out. If the price of gold is set daily in London by the Rothschilds, how is that a reflection of reality? If and when the price of this commodity reaches a point where it makes sense for those investors who control the market to crash the price, what it there to stop them? It happened to the British during the Napoleonic Wars, more recently Soros manipulated silver and brought Britain to its knees. From my layman's perspective, it seems that this metal is just as vulnerable to manipulation as anything else, so where is the safety? I understand that all the big players have a lot of it. But those people also know when the market will move because they are the ones moving it. Any help here?
I'm sorry, but that just isn't true. There has been some gold hording in the past, and notably, the silver shortage you mentioned (along with a "silver bubble" in the 70's caused by American "investors"). There is no pent up demand for gold, driving prices higher, as your Rothchild case would assume, the only reason gold is increasing in value is due to the inflationary policies of the fed over the last 50 years.
I understand you think that the amount of gold owned by a single party is causing price setting conditions, but I argue that this just isn't true. The majority of gold in the world is in the NY Fed banks, it is owned by foreign nationals and nations and no one entity owns enough to consider the gold market "fixed."
Another thing I was wondering, especially considering inflation- wouldn't the value of companies be reflected in their stock prices, even if there was inflation?
A factory, for example (not that many are left in the US), still has a "real" value, and that real value would rise along with inflation. And so, wouldn't a company's stock reflect (bubbles aside) it's "real" value?
Or is it simply a smarter option to ignore US stocks in general, and go with investing in "growth" markets?
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