Rumpelstiltskin! I Know Your Name

Recently I received an emailed article from a friend of this blog championing a return to the gold standard and embracing the principles of the Austrian school of economics to limit the abuses, excesses, and follies of our current government, fiat currency wherever it can be found and government power in general. It was a fine emotional rant. I was at least somewhat sympathetic to its spirit and content. Of course, run out and buy gold was an underlying assumption of the article.

There is no reason gold should be money anymore than oil or large rocks, but for over 5,000 years people have believed gold is money, so gold is money. Even if gold is the king of commodities, it is still just another commodity, a commodity I might add, that has few real productive uses. Its true value is ultimately its perceived value. Gold is often thought of as a hedge against inflation but that is not completely accurate. The price of gold peaked at something over $1,000 an ounce in 1980 and then over the next 20 years collapsed to about $250 an ounce. All those years we had inflation but no run up on the price of gold. More recent studies have found a close correlation between the price of gold and fears of an economic upheaval. In the years following the election of Ronald Regan, the economy in general and the stock market in particular enjoyed an unprecedented bull run. Even in the months following the Y2K technology bust in 2000 these were good times. People were happy and optimistic, employment was high, and real estate prices only went up. Today, by contrast, the stock market is down, real estate is a bust, unemployment is high, and the value of the American dollar is threatened by our horrific deficits and the bailouts of the financial and automotive industries. People are frightened, angry, and pessimistic. Historically, these are good times for gold.

Gold is one of the few or perhaps the only commodity that over the course of history has been manipulated by great nation states for their own purposes. The price of gold can be driven up or down significantly when a country, for its own reasons, buys or dumps gold by THE TON rather than by the ounce. This is one of the driving factors for the current run up in the price of gold. Lately, China has become a little nervous about the enormous amount of questionable American debt they hold in their portfolio. They can’t dump it without destroying the value of their holdings and ending their plans to become an industrial superpower at our expense. Therefore, like me, the Chinese government is hedging their position in US Treasuries with the purchase of gold, copper, and other commodities. In a recent article found of Yahoo Financial, the author reports, “Last month, for example, India's Central Bank bought 200 metric tons of gold from the International Monetary Fund. India's gold spending spree cost the country $6.7 billion. While the exact price per ounce they paid isn't known, India's purchases were made between October 19-30, suggesting a purchase price between $1,000 to $1,040 per ounce.”

Will this bull run last forever? The values of all commodities rise and fall over time. Gold is no different. The aforementioned article by Ron DeLegge observes, “The creation of the first gold Exchange Traded Fund (NYSEArca: GLD) back in 2004 was a true turning point in gold's modern history. Before that time obtaining market exposure to gold was limited to owning the asset in some physical form or owning gold stocks. GLD changed everything by making gold an easily accessible asset. Today, with the click of a button, a person can buy 'paper gold' in the form of a gold ETF.

Even though gold soared, not much actual trading of physical gold has been taking place. In contrast, with $35 billion plus of assets and growing, the SPDR Gold Shares ETF dominates the market in paper gold trading. Could its success also become its downfall?

While GLD has converted millions of investors into goldbugs, its intraday liquidity can easily convert them into gold sellers. Once the number of new gold buyers dries up, who will be left to keep the gold market heading higher? Like any market, the contagious effect of selling pressure can quickly turn gold into an unwanted asset.”

I have something on the order of 3.7% of my investments (excluding my house) in gold and silver, mostly in gold equivalent shares (GLD) and another 1.5% or so in a Canadian gold mining stock. I am shooting for about 5% in gold. When inflation kicks in (and it will) I just can’t say when, gold will skyrocket. Right now gold is experiencing a technical correction (short term drop). If it goes low enough, I will buy some more.

The problem with looking to gold for your salvation is the United States government confiscated all privately owned gold in the 1930s, at a price lower than its true value. They did it once they can do it again. Having a few gold and silver coins buried under the hog trough is comforting but in a real Road Warrior scenario, you want to own shotgun shells, gasoline, and cigarettes and bar soap for trading purposes.

If our currency was completely backed by gold there would be too few dollars to fund the follies of our government but there would also be too little money to fund legitimate business expansion or even the purchase of family homes. Maintaining the balance has been a problem for capitalism since Bumpus stored his two gold pieces in Vincenzo’s vault.

Buying gold and silver systematically in small quantities is probably a good plan even if there is a short term drop, but then I am not a registered professional advisor and if I was all that smart, I would be rich.

A good meditation for all of us, from the twelfth chapter of the Gospel according to Luke:

[15] And he said unto them, Take heed, and beware of covetousness: for a man's life consisteth not in the abundance of the things which he possesseth.
[16] And he spake a parable unto them, saying, The ground of a certain rich man brought forth plentifully:
[17] And he thought within himself, saying, What shall I do, because I have no room where to bestow my fruits?
[18] And he said, This will I do: I will pull down my barns, and build greater; and there will I bestow all my fruits and my goods.
[19] And I will say to my soul, Soul, thou hast much goods laid up for many years; take thine ease, eat, drink, and be merry.
[20] But God said unto him, Thou fool, this night thy soul shall be required of thee: then whose shall those things be, which thou hast provided?
[21] So is he that layeth up treasure for himself, and is not rich toward God.