Is Gold A Bargain At $950/Oz!
I’m finally back in the US! Last week, I heard Dr. Marc Faber, of GloomBoomDoom
fame, on CNBC India. While gold is currently at a whopping $973/Oz, on that day gold had briefly touched $950/Oz for the first time ever.
Dr. Faber said two things that were very interesting:
1. Gold is a bargain at $950/Oz
2. Fed Chairman, Ben Bernanke doesn’t understand how the economy works
Seems like he agrees with Jim Rogers!
I’ve been advising everyone to invest in gold since it was $500/Oz. Of all the people I know, maybe 3 or 4 actually followed my advice and bought some gold. Most people thought I was stupid and vehemently disagreed with me. Most of their arguments consisted of the following points:
1. Gold has been a terrible investment for most of history and in fact had declined from its peak in the early 80’s for 17 years.
2. Gold doesn’t pay interest and you’re blocking your money.
3. Gold has no real use. It’s just some rich people who are propping up the prices.
While, these are all valid points, they didn’t touch the main point of gold being a store of value. In times of uncertainty and times of hyperinflation, gold always does well. Whenever there is a lack of confidence in the banking system, gold prices tend to shoot up.
John Lee, portfolio manager at Macau Capital Management, has a good explanation:
Banks create dollars out of thin air and loan them to people. Even though money is created out of thin air, once the borrower pays back the loan, the transaction is complete and those borrowed dollars perish in bank’s books. In this scenario, the dollar’s purchasing power is preserved through non-dilution.
However, as we have witnessed through the recent subprime fiasco, many parties are getting away without fulfilling their obligation to repay a loan. Institutions were bailed out as the Fed bought their mortgage positions at face value with new money. Consumers were bailed out as lenders were elbowed to freeze foreclosures, freeze rate resets, forgive loans, and make lower payments.
Such compromises erode confidence in the system. If one person can get dollars through borrowing without paying back, and yet another had to work to obtain and save dollars, it is surely not an incentive to earn and keep dollars. Rather, it is a no brainer to borrow dollars and spend unabashedly. Savers are the most risk averse bunch of people, and when the monetary rules are muddied, they will opt out. This is how a run on the dollar starts.
Interestingly, unlike Faber or Rogers, Lee maintains that Bernanke does know what he’s doing and that its the correct course of action for the Federal Reserve.
Today, the USA is the world’s largest debtor nation. Regardless of how high oil is, there is no room to raise rates with tens of trillions of dollars in debts to be serviced.
Don’t blame Bernanke for our problems; even if Volcker were to be the chairman today, he would have acted in exact same way as Bernanke did.
The ideal dream for debtors is inflation, which is precisely what the Fed is advocating – expanding money supply through lowering interest rates and direct handouts. The Fed’s action is entirely logical acting on behalf of the average American, which is heavily in debt.
While I would contend that debasing a currency just because you can’t afford the interest payments is a wrong thing to do, Lee does at least agree that fiat money always results in hyperinflation.
The deflation camp has been on the wrong side throughout EVERY fiat money experiment thus far. The bear camp contends that the debt burden will eventually become so large that eventually the debt bubble will blow and the prices of everything stocks to real estate to copper and zinc will collapse.
Fiat money systems have always resorted to hyperinflation and destruction of the currency without fail. If hyperinflation could be avoided in a fiat system by the creation of the Fed, the Argentines in 2002 surely would have figured it out and avoided their hyperinflationary disaster.
He also thinks that the Federal bailout will lead to a further weakening in confidence which will cause the dollar to drop further.
The idea that the Fed and the government will allow debt cleansing lasses faire style is patently absurd in my opinion. Central bank action has spoken louder than words in the past six months as record $1 trillion+ has being printed to rescue banks. For instance, England’s largest mortgage lender, Northern Rock, has been nationalized. And as for the consumers, loan amounts are reduced without penalty or conditions, mortgage rate resets are postponed, federal guarantee limits are set to increase.
Here we go back to psychology. It is not so much about the amount of bail out money being printed, but rather that the smart money took issue with the way the handouts were given unconditionally across the spectrum. Confidence in the dollar was further eroded.
Ok, so what’s his point? Lee thinks that gold is heading much higher.
Gold is money and a refuge of capital when a defective fiat money system shows its ugly head. Gold is universally recognized, portable, divisible, liquid, and limited in supply which makes it the only real viable option as store of wealth. Today’s gold price has not fully priced in dollar’s deep and terminal issues and there is nothing that can be done to stop the further rise in gold. The Fed can talk tame CPI to try stabilizing commodity prices but the effect will be limited. Mind you, gold’s rising popularity should be seen as positive; the fall of the dollar system levels the playing fields for global consumers and producers.
The markets can easily handle $3,000 - $5,000 oz. gold in the near term horizon with minimal disturbance. It is when gold rises too much over $5,000 too fast that we might start to worry about global inflation panic.
Wow, gold at $5,000/Oz! That’s a bold prediction. I’m not sure if I agree with him, but I’m still sticking to my belief that gold will reach somewhere between $2,500 and $3,000 in this cycle. Look for gold to break $1000/Oz around the middle of March when Bernanke drops the federal funds rate another 50 basis points.
And whether or not Bernanke knows anything about the economy is still up for discussion. The popular consensus seems to be that he doesn’t!
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March 2nd, 2008 at 7:27 am
I get the whole currency thing with gold, but the “no real use” is what prevents me from looking at gold. I’d rather have a barrel of oil. It’s got the same scarcity. If you think the dollar will continue to weaken it’s a great hedge. Lastly it actually has demand that will only grow over time because people NEED it. A similar thing could be said of the agriculture market.
I have never seen someone die or lose the ability to physically run the machines of their business because they lacked gold.
March 2nd, 2008 at 11:37 am
Gold is a special case. It moonlights as a commodity, but really it is much more. Gold has been treasured by humans since the beginning of time, whereas crude oil has been marketable only in the last century. The desire for gold has driven the exploration and exploitation of the world. Thousands have died for gold. When oil is gone, gold will still be here.
What if you could invest in only one thing from the dark ages to the end of time? What investment has always been valued, always marketable? Gold, of course.
That doesn’t necessarily make it a good short term investment, but long term, and in times of dire markets and shaky economies, yes.
March 2nd, 2008 at 12:22 pm
Gold actually has quite a few commercial uses, but it is so expensive that alternatives are often used. Even if currencies were to stop pegging themselves on the value of gold, there would be the intrinsic value remaining (although much less than it is now). But that’s pretty much a moot point in this conversation. I just wanted to add some “gee whiz” info.
March 2nd, 2008 at 2:24 pm
It’s true that gold, being a great conductor does have commercial uses, but as mentioned, the value of those uses is closer to copper which is a whole lot cheaper at this point.
Kristin brings up a good point, but I don’t think the value of gold in the middle ages is really that important today. Columbus went sailing around the world for spices. Obviously they aren’t as valuable today.
Since other metals appear very much the same, I suspect that people will soon say, “I’d rather have some fake gold that will fool everyone into thinking it’s real AND a great multimedia system over just the real gold and no television system.”
It’s simply common sense and people will realize it someday.
March 2nd, 2008 at 2:49 pm
What gold does is keeps your savings static. It prevents a future loss of your present savings purchasing power. It aids a person from losses due to stagflation and inflation and even deflation. Gold cannot be created from thin air. Gold represents all the past sweat and toil and energy of it’s extraction. Gold is in reality a true currency historically.
March 2nd, 2008 at 6:25 pm
Lazyman,
gold is a store of value. in 1960 an ounce of gold bought you a nice suit. the same is true today.
according to various sources, if inflation was calculated similar to the way it was in the 70s, we’d be seeing 12% inflation.
with CDs paying 4%, you’re losing 8% a year by saving your money. gold prevents this loss of purchasing power.
Remember last May when you thought gold was a terrible investment at $645/oz? Its up nearly 50% since then!
March 9th, 2008 at 8:16 am
[…] OFF DIVIDENDS presents Is Gold A Bargain At $950/Oz? posted at LIVING OFF DIVIDENDS, saying, “With Gold ready to break $1000/Oz is it too late to […]
March 9th, 2008 at 8:16 am
[…] OFF DIVIDENDS presents Is Gold A Bargain At $950/Oz? posted at LIVING OFF DIVIDENDS, saying, “With Gold ready to break $1000/Oz is it too late to […]
March 10th, 2008 at 7:00 pm
I’ve always figured gold as a smart investment *at the right time*. That’s not unlike any other investment, really, but it’s very important to gold.
When everything’s going great in the world, gold is a horrible investment - dropping in value, or stagnating ( not keeping pace with inflation ). But over the past few years, with the falling dollar, tanking stocks, foolish wars, etc, people rush to gold. Ignoring that and missing out is almost foolish. Just because it’s somewhat irrational doesn’t mean it’s not real.
I know gold doesn’t *do* anything. That’s OK with me, just so long as it keeps paying so well.
March 11th, 2008 at 10:35 am
According to another popular writer, Bill Bonner:
“Even at today’s price around $975, gold is still less than half the inflation-adjusted high it set the year Ronald Reagan moved into the White House. And think of all that has happened since then! For one thing, more gold has come onto the market. Gold is never destroyed or used up. Still, an additional ounce of it is much harder to make than a crisp, new $100 bill. You have to find it and then dig it up out of the ground. That’s why the world’s gold supply increases only about 2-3% per year.
“But the supply of the paper money — in which gold is calibrated — goes up much, much faster, at least four or five times as fast over the past 30 years. And the world’s assets — also measured in paper money — have skyrocketed too. Our houses are worth three, five, 10 times as much as they were in the early Reagan years. So are our stocks. What’s more, now there are trillions of dollars worth of tradable financial assets in places where none existed at all in ‘79 — such as in India, China and the former Soviet Union.
“Gold began floating on this flood of liquidity nine years ago. It has doubled… and doubled again. Since 2001, it has gone up 240%. Since Ben Bernanke began cutting rates on Sept. 18, 2007, it has gone up 37%. And if you believe in the volume theory of money — and we do — you can reasonably expect its price to keep going up. Gold is, ultimately, money, and it is also the world’s ultimate money. Adjusted for inflation, it will have to go up to $2,500 or so, just to match the peak set in 1980.
“Most likely, it will go far further; we’re no longer young and foolish enough to think we know where.”
March 14th, 2008 at 5:08 pm
[…] OFF DIVIDENDS presents Is Gold A Bargain At $950/Oz? posted at LIVING OFF DIVIDENDS, saying, “With Gold ready to break $1000/Oz is it too late to […]
March 18th, 2008 at 4:46 am
Carnival of Everything Finance - #15…
Carnival of Everything Finance - #15
Welcome to the March 17, 2008 edition of Carnival of Everything Finance.
We had over 110 really good articles submitted for this edition. Unfortunately I could not include all of them.
I hope you enjoy read…..