Questions on Gold and Money
I just read through a long thread comments on the previous post found at the link given therein.

I don’t suggest reading through all 76 some comments, but I did write a synopsis in question and answer form.

Correction: In the previous post we mentioned that Gold did not compete with Inflation, citing the chart of M3. This may be incorrect as Gold does indeed act as a sufficient hedge over long periods of time. (As cited below M2 Prime may be a better measure).

~~~

What is Gold?
Gold is a commodity just like any other.

What is Money?
“Money” per se is anything of value to anyone in exchange for any other commodity, i.e., rare Sea Shells, Manual Labor or abundant pieces of cotton-paper.

Is Gold money?
Gold has attained it’s status historically as a monetary medium due to its physical and sentimental values (durability, scarcity, divisibility rare color). It has thus been fairly adequate for safe, abundant and enduring accumulation.

Is Gold a decent hedge for Inflation?
If you want to buy a Coke you’ll need some greenbacks. You want to be able to buy that same Hugo Boss suit in 40 years from now? Use an ounce of Gold.

Will Baby Boomers/ Retirees buy Gold?
They’ll buy whatever hands over the most return for any “safe” asset. First it was Bonds, then Real Estate, gold seems to be next.

Will Gold ever be confiscated?
Possible, but not probable. Gold’s market is too small and insignificant to chase after with the Law. Even if it was, few would hand it over. Many in 1933 just hid it under the mattress. As I recall, not one arrest was ever made on the matter.

Is Gold a Good Investment?
Well, if gold is just another asset class then looking at the Dow/Gold ratio should give us our answer, as one of the commentators mentioned. In terms of Gold the Dow is still overvalued by historical standards. Over the next few years Gold should continue to outperform.

Does Gold offer Interest or Dividends?
No. That’s the price you pay for “Tranquility”.

Does the Federal Reserve care about Gold?
Based on their statements I’d say they do and very much. Even Ben Bernanke has mentioned his concern for the rising gold price and will be watching it closely.

Gold ETF or Gold Bullion?
If you’re buying to “make money” then buy the ETF – easy to buy and no storage. If you’re buying to secure wealth (like the Indians are) then buy Bars.

Will Silver outperform Gold?
Technically, the ratio has been between 1:10 to 1:100, currently at 1:48. Fundamentally though, the consuming supply of silver may be dwindling faster than that of gold.

Should we calculate Inflation with M2 prime instead of M3?
IMHO, Definitely!

If Gold is worth so much – sentimentally – why then do Hedge Funds, Institutions and Governments still deal in Fiat Currencies?
This is because they are the ones who make it. They can’t increase the supply of gold but today they could create billions of dollars with a stroke on the keyboard.

This is no conspiracy. It happened in Rome, Spain and Greece. No Fiat currency has ever survived but if that’s all that is legal tender its what we’re forced to use. We get used to it – they get used to it – We all forget about Gold and the days when wealth was defined by how many cattle you owned or how many fields you had. Not in valueless IOUs.

Do I own Gold?
Yes, but I will own (stocks in) companies become cheaper to own – circa P/E ratios of 8-10 and when they attain a greater Margin of Safety.

Final Words:
Rule #1. Don’t Lose Money. Rule #2. Don’t Forget Rule #1.

Advertisements

Tags: , , , ,

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: