Why Gold Will Continue To Rise

Excerpts from The Toronto Star:

David Olive's blog

I still hate gold as an investment.

You can’t eat gold, burn it for warmth or transportation fuel, or build with it. Concrete, steel and wood, so lacking in beguiling charm by comparison to gold, are the ticket for bridges and backyard decks, and not the notoriously soft “yellow metal.”

Gold earns no income — it pays no dividends or interest — and in the meantime is a cash drain in storage and security costs if one takes physical possession of it. And the day a Tim Hortons outlet or the local Ford dealership accepts gold as legal tender, I can assure you that unless the incident is a publicity stunt, the transaction will make front pages worldwide.

Still, this is the goldbugs’ hour.

The gold price leapt 40 per cent in 2009, the first full year of the panicky Great Recession, when banks were collapsing and nations were revealed as flirting with insolvency.

Last year, physical bullion investment jumped 66 per cent, from direct purchases of gold wafers, coins and bullion, and from goldbugs switching from gold futures (mere paper!) to possession of the metal itself.

Late last month, the gold price breached the $1,500 (U.S.) per-ounce-mark for the first time.

Sad to say, that’s still about $2,500 below the inflation-adjusted all-time high for the gold price 30 years ago, at the time of the last great piling into gold.

Among the drivers of a spiralling gold price is fears of rampant inflation, which weakens the buying power of state-issued currency — or “fiat money,” as goldbugs call it.

Yet inflation has been quiescent during the most recent gold panic-buying. Indeed, deflation was the greater worry during that time.

Some of the staunchest goldbugs are now cashing in their gold winnings, including George Soros, one of the biggest commodities bettors. Two years ago, at the annual Davos summit, Soros warned that “the ultimate asset bubble is gold.” Soros then doubled down on his gold bet in order to profit from its coming zenith. But Soros has lately been dumping gold, along with many other — but by no means all — “super-investors.”

And gold has a nasty habit of abruptly losing value, as in 1915-20, 1941, 1947, 1951-66, 1974-76, 1983-85, 1987-2000 and 2008. Millions of foreclosed-upon U.S. homebuyers were similarly told that U.S. house prices had never fallen. Until they did, by as much as 90 per cent.

Yet the thing I most dislike like about gold as an investment is that it sucks capital out of the economy. An investment in gold is money not available, through the stock and bond markets, or even a savings account or consumer purchases, to finance entrepreneurial start-ups, plant expansion, -product development and job creation.

MarketWatch contributor David Weidner put it best, I think, in this recent Swiftian passage:

“Gold makes a statement. It says, ‘I think the American people work as hard and are as resourceful as anyone on the planet,’ and then adds, ‘but for now, I’m just going to hide out in this bunker and eat Spam until someone else has the guts to create a new business with a great idea and gives me a job.’”

Weidner implies that gold investing is unpatriotic. I wouldn’t go that far. But as with taking possession of a Rembrandt at auction or scoring a $384,000 half-litre of Bordeaux, a goldbug is not doing his or her bit for fellow citizens.

Quite the opposite, I’m afraid. The goldbugs’ necessary nattering about the sky falling is a drag on the faith we place in a just society. Which the trajectory of history suggests is our most likely future.

Comments:

The moronic conclusions of this Toronto Star blogger are quite comical in the proper context.

It is clear he has little understanding of how a market functions based on supply and demand.

As a journalist we expect more from him as he asks the wrong questions and comes to incorrect conclusions.

A good question would be: why is gold rising?

Why are common people flocking to gold? This is particularly relevant if, indeed, we have a  "just society" as he claims.

Why would people buy gold that "pays no dividends or interest"?

Why did gold "lose value" during the periods he mentions?

Let's examine these better questions that need to be asked.

First - the fiat "price" of gold is highly correlated with the degree to which central banks interest rate policies are neutral, restrictive, or loose.

Currently we have very loose monetary policy throughout most western democracies, which make up the bulk of global GDP. This means it is very cheap to borrow money compared to the rate of inflation which creates hot money flow into all sorts of asset classes including real estate in China, most commodities, and gold, the monetary asset with a 5,000 year history.

Why would people buy gold that pays no interest? Because hot money flows create assets bubbles that have shown up repeatedly in the past fifteen years. First the tech bubble boom and bust, then more accommodative interest rates creating the housing boom and bust (in the US, coming soon to Canada, Australia, and China), and now a stock market boom since 2009, with bust yet to come.



A more honest journalist, without preconceived notions or an axe to grind, would mention that his beloved fiat currency also loses value. When did this happen? Since the inception of central banks in this journalist's "just society". In Canada this took place in 1935 with the creation of the Bank of Canada, and in the US in 1913 with the creation of the Federal Reserve.

How much value did the dollar lose since the inception of central banks in North America?

About 94%.

For reference consider the Bank of Canada's inflation calculator link here.

That's right, a "basket of goods and services" that cost $100.00 in 1935 would cost $1,658.33 in 2011, a 94% drop in buying power.

In 1935 an ounce of gold was approximately $37 Canadian ($34.84 US).
Today, in 2011, and ounce is $1455.41 Canadian

Total change in gold's buying power +137%

So are the gold bug's loss of faith justified in fiat dollars? The numbers say Yes.

Are gold bugs unpatriotic, or a "drag on society"? The numbers say No.

Is our society a "just" one?

The numbers speak for themselves. How can anyone argue the loss of 94% of the buying power in a country's currency reflects a just society?

I say it reflects a fraudulent society built on lies and coercion, one of the biggest lies being Central Banking and unrestrained printing of fiat currency.