patrick.net

What some people are insuring against by buying gold, is that the Fed is going to be forced to stop the flow of easy money because they will have broken the dollar. By their decades long policy of devaluation they will have brought the dollar down to its intrinsic value of zero--which is where all fiat eventually goes. When the dollar is finally broken gold will be money.

As James Dines says, "When this bubble, this currency bubble, the biggest bubble in history of printing money and everybody thinks it's normal, when this bubble collapses gold is going to be money. And If you don't have any gold, you are going to be screwed."

As Marc Faber says, "I still believe the best currency is gold and silver, and this is not the perception of most people. They believe gold and silver are speculative investments."

Marc Faber further says, ""So they have to invest in something, and so they look for real estate, they look for equities and of course they come to realize slowly, I have to say very slowly, that gold and silver are not commodities in the sense of industrial commodities, but that they are currencies. Precious metals are basically currencies that are honest because you can’t increase the supply indefinitely. You can’t have QE2, QE3, QE4 in the gold market."

To my mind, gold is a backup currency held as insurance against other people's stupidity breaking the dollar. We're lucky we have it. And as Albert Einstein said, "Only two things are infinite, the universe and human stupidity, and I'm not sure about the former." Infinite stupidity leads to infinite money printing. Good luck!

Housingwatcher,
You are aware that the IMF believes Gold is a Money - the key phrase is IMF holds Gold for financial soundness
- "The IMF holds a relatively large amount of gold among its assets, not only for reasons of financial soundness, but also to meet unforeseen contingencies. The IMF holds 103.4 million ounces (3,217 metric tons) of gold, worth about $83 billion as of end-August 2009, making it the third-largest official holder of gold in the world."
http://www.imf.org/external/about/gold.htm

Isn't IMF Chief was captured and will be sentenced because he bought lots gold with dollars?

wk, with the way you pump about gold, you could be next :)

Xeogear3,
It took me a number of years and lots of mistake to finally understand the value of Gold.
I'm not recommending that anyone go out and buy lots of Gold today or tomorrow. But, if you are interested in preserving the purchasing power of your savings it is important to learn about gold and the develop a plan to start acquiring it.

Best Regards.

Don't you think that you are a little bit too late to tell us that?

I don't understand your question.

Do I think Gold has had its big move or my motivations in trying to get people to understand the importance of Gold for savings?

A great article by John Rubino - he was sharp enough to see the Fannie Mae crisis way back in 2003 0or 04 - and he understands more about Gold and Real Estate crisis than any writer out there.......The Housing double dip QE3 and Gold -
"With housing falling and government stimulus shrinking, all the macro pressure would seem to be on the downside. Which means a weak economy going into a presidential election year, something that is virtually never tolerated by the folks with the printing press. So…yet another data point in favor of QE3 or some other big liquification event — and another reason to load up on gold and silver in the very near future"
http://dollarcollapse.com/housing-bubble/the-housing-double-dip-qe3-and-gold/

If you think that dollar will collapse, buying gold is really a "slow" method, because it is already up 5 times since 2000.

The best way is to buy houses with borrowed money. After dollar collapse, you get all these houses for free.

Xenogear,
Buying Real Estate is a leveraged play - borrowing Money to control an asset you normally can't afford.
Leverage=Increased Risk (lots of risk)

During the Real Estate Boom the everyone was convinced that Real Estate offered a leveraged investment with no downside - many were wrong.

The major draw back to the using leverage with Real Estate is you need lot of cash flow to pay your Mortgage payments,Real Estate Taxes, and upkeep.

If you read John Rubino's article he thinks there is another leg down for Real Estate. Mr Rubino called the Fannie Mae crisis years before anyone else and has been right numerous times - I'm not willing to bet his against advice are you?

Gold is money.
Money is not an investment.

sybrib- exactly......
The IMF calls Gold Money as I mentioned earlier-
why for financial soundness and to meet unforeseen contingencies - it sounds like IMF thinks of GOLD as the IMF Emergency Fund - why doesn't the average American realize Gold is Money and has been for a very long time??
"“The IMF holds a relatively large amount of gold among its assets, not only for reasons of financial soundness, but also to meet unforeseen contingencies. The IMF holds 103.4 million ounces (3,217 metric tons) of gold, worth about $83 billion as of end-August 2009, making it the third-largest official holder of gold in the world.”

So you use dollar (which is money) to buy gold (which is another money). This is no different from exchange dollar to Japenese Yen or Chinese RMB.

Sure. Gold went up 5 times in the last 10 years. This doesn't mean it will go up another 5 times in the next 10 years.

I still think that buying positive cash-flowed stock or real estate is a better idea.

wk says

why doesn’t the average American realize Gold is Money and has been for a very long time??

Because I can't go to the store and buy groceries with gold.

The use of the term "money" here is meaningless. Most people use the terms "money" and "currency" interchangeably, and gold isn't used as currency at present, so to most people it isn't money.

As far as investments go, it's idiotic to say that money can't be an investment. Buying Euros in 2000 and selling them in 2010 would have been an amazing investment.

Kevin,
Definition of Money:
"mon·ey
3.
gold, silver, or other metal in pieces of convenient form stamped by public authority and issued as a medium of exchange and measure of value. "

Many people opt for American Eagles Coins- stamped by the United States Mint in Silver or Gold because the feel this is a real form of money.
http://www.usmint.gov/mint_programs/american_eagles/index.cfm?action=american_eagle_bullion

Gold is worth what someone will pay for it.
When folks feel they need it the price goes up according to the level of paranoia.
If they feel they don't need so much of it they won't pay as much.
Don't forget the asked/offered % spread on small coin/bullion.

If...if employment and wages rise the level of paranoia will lessen.

Owning gold is an effective bearish hedge requiring little effort.
Owning real estate is a business requiring work. I personally know more self made millionaires (in cash) than the same with gold. I know ordinary folks, not hedge fund traders.

You are taxed out the ass on all GOLD precious metals... Most people don't even realize this until they go to sell! They are considered collectibles and taxed at 28% by the FED even long term investments. Then another 10% tax by the state of California...

So if you buy gold.. you basically owe Uncle Sam nearly 40% of your profits... That's not the best investment going forward.

Especially with the stock market nearing 2007 bubble levels again... I feel like we deflated one bubble.. "housing".. and all that hot air went into the GLD... Then the stocks started inflating back to bubble levels...

Now if GLD bursts... maybe housing will re-inflate... who knows... The money... imaginary or not always seems to inflate some other sector as another sector is deflating....

housing is unlikely to inflate without some insane government money pumping.

There has been some talk about Liar IPO's being legalized, so maybe another internet boom/bubble is next. It's hard to predict those things unless you just one day see average American buy into crazyness on the main street.

Mr Mortgage - Mark Hanson does a great job highlighting the distress in the Real Estate Market and especially the shadow inventory.
http://mhanson.com/blog

Shadow Inventory + decreased availability of credit = Trouble of Real Estate

Everyone I know who has purchased Gold is fully aware of the Lousy tax treatment of Gains by the IRS. Buyers are buying to have a store of value and not for an investment. People put a portion of their saving in Gold for diversification and preserve the buying power of their savings.

Gold Bullion doesn't go to zero or get locked up like Paper Investments can - Gold Bullion can be liquidated much faster than many Paper Investments.

If you know anyone that had Money in the "Reserve Fund"
http://en.wikipedia.org/wiki/Reserve_Primary_Fund - Investors had no access to their Money for 12 months. This is an extreme case, but it illustrates the flaw in our illusion of safety of Paper Investments.

For all those who think gold is in a bubble already, I quote Nouriel Roubini who said this in 2009:

“Gold is inversely correlated to global short-term interest rates and there is a race right now towards 0%. Production is down 4.0% y/y while fiat currencies globally are being created at a double digit rate by the world’s central banks….As for all the talk of a ‘gold bubble,’it would take a nearly 625% surge in gold to over US$6,000/oz and a flat stock market to actually get the ratio of the two asset classes back to where it was three decades ago when bullion was in an unsustainable bubble phase.”

Jim Grant from Interest Rate Observer: “Gold is the reciprocal of the world’s confidence in the likes of Ben Bernanke. I think the price will go higher.”

Since the Fed is engaged in distorting the dollar through quantitative easing a.k.a electronic credit creation, Once you start pricing housing in gold, things become more clear: http://dailycapitalist.com/2011/06/01/home-prices-vs-gold-vs-inflation/

Debt has reached unsustainable levels in most of the Western Countries (PIIGS in Europe, US) and how will it get resolved? For this, I quote Ludwig von Mises:

“There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.”

Fed has chosen to debase the currency system. Pick your bets accordingly.

austrian_man says

Fed has chosen to debase the currency system. Pick your bets accordingly.

Yep, it is literally impossible to pay back this debt. The only way it could be paid back in our lifetimes is to inflate it away by debasing the currency. This is what governments have always done for thousands of years. Here's the strategy outlined:
http://www.kingworldnews.com/kingworldnews/Broadcast/Entries/2011/6/4_Jim_Rickards.html

Interesting discussion about gold as a "store of value" v. money. I think it's more like money, but that opinion may not matter much. As I understand, there is much more so-called value in derivatives for gold than there is actual bullion--perhaps by a factor of 100. So it won't take much of a decline to make investors run for the door--though I can't fathom what would create such a run currently. The psychology of gold ownership borders on religion, and that's a good prop for the price in uncertain times. On the other hand, fear is also a strong motivator.

X4Gregor says

Interesting discussion about gold as a “store of value” v. money. I think it’s more like money, but that opinion may not matter much. As I understand, there is much more so-called value in derivatives for gold than there is actual bullion–perhaps by a factor of 100. So it won’t take much of a decline to make investors run for the door–though I can’t fathom what would create such a run currently. The psychology of gold ownership borders on religion, and that’s a good prop for the price in uncertain times. On the other hand, fear is also a strong motivator.

Value is an ambiguous term, in the sense that it can mean different things for different people. Gold is a store of purchasing power, purely because of the fact that it cannot be printed at will. The Government cannot debase gold, as a result it retains purchasing power. (you can measure purchasing power in loaves of bread, a nice suit etc.)

If you want to store purchasing power, then paper markets are not the place to be for precious metals. Physical holdings are the best, because the very reason you want to own precious metals is that they carry no "counter-party risk". Derivatives carry counter-party risk because the institution managing the derivatives can default on its obligations.

If one does not understand the importance of gold and the current mad state of our monetary system (which abandoned the gold bond in 1971), then yes - when they see gold's performance - it would feel like as if gold ownership is like a religion.

The madness is actually on the other side, where private institutions can create money out of thin air and fund government spending, ensuring that the citizens are enslaved forever in debt.

state says

austrian_man says

Gold is a store of purchasing power, purely because of the fact that it cannot be printed at will.

other things that cannot be printed at will:

iron

sulfur

mercury

tungsten
Congrats on letting the guys at goldline.com pour bullshit in your ear until you think that gold has something going for it other than being pretty

what you say is true and you know what the funny part is? History says that Iron has been used as currency.

Sulfur, Mercury, Tungsten also cannot be printed at will. Gold has some other properties as well - it is non-corrosive, does not undergo oxidation when exposed to moist air, easy to handle when alloyed with copper (commonly done for coins), divisible due to its malleability and homogeneous (any piece is like every other piece).

I'm not a chemist to know whether the metals you mention fit all those properties, but I'm sure they don't satisfy ALL those criteria, otherwise they would have been chosen as medium of exchange in history.

lol - goldline seriously? thats the best you got? Instead of refuting my points in a reasonable way, you pick the idiots who advice on gold investing and trash me.

state says

austrian_man says

Gold has some other properties as well - it is non-corrosive, does not undergo oxidation when exposed to moist air, easy to handle when alloyed with copper (commonly done for coins), divisible due to its malleability and homogeneous (any piece is like every other piece).

all of this is completely irrelevant, how do you not understand this? who cares about malleability?
or do you want to go to a completely coin based system where you literally must carry the gold around with you to trade?
btw, the medium of exchange that history has chosen is THE DOLLAR/EURO/YEN etc. or do the last 60 years not count as history

It is relevant because you brought up sulphur, mercury, tungsten etc. and asked why are we not considering them as money? I just gave you the historic reasons as to why humans believe gold is superior to other metals.

I'm not saying we should go to a coin based system where we have to carry gold to trade. All I'm saying is that money has to be chosen by the free market. Not by decree of the government. Simple reason being the only way people can restrain their own government from spending beyond its means is when people control the money.

How do you think the debt never spiraled out of control during the 30s to 70s? Purely because United States honored the gold bond for the US dollar.

Read this: http://www.constitution.org/mon/greenspan_gold.htm
That was none other than Alan Greenspan, the brain behind the housing bubble. Greenspan has never publicly retracted even a single word of that essay. makes you think doesn't it?

Last 60 years is a blip compared to entire history of human existence. Yep the public has been using fiat currencies as medium of exchange, because they don't have a CHOICE. Free market is a joke when money is not free.

The global financial system is really on the precipice of another recession and the cracks are obvious for those who wish to see beyond the mainstream noise.

If we are on gold standard, does your boss pay you gold? or is direct deposit ok too?

The financial system is different today than 1000 years ago. There is very little "cash" involved.

Gold is clearly a bubble just like housing was. And like all bubbles, it's impossible to predict when it will pop close enough to profit from shorting it unless you have inside information. As John Maynard Keynes said, "Markets can remain irrational a lot longer than you and I can remain solvent."

That said, gold is riskier than housing because of two things. First, those who were serious about selling houses in 2007 when the housing bubble burst could have simply sell them for a modest loss. They choose to ignore the burst and thus suffered greater losses. When gold drops that won't be an option because gold is far more liquid of an asset. That means that everyone can sell more easily and the price drop will be much quicker.

Second, and perhaps even more importantly, in housing you can simply walk away from a mortgage in a non-recourse state and the only negative effect is seven years of having a foreclosure on your credit report. This has practically no effect on a person who isn't taking out any loans. However, if you overpay for gold and then the bubble bursts, you have to bear the actual loss of capital.

Any investment that offers quick gains entails high risk.

Lately I don't know anymore. It seems like a bubble, but with Fed handing money out to banks left and right it's hard to tell anymore. Not to mention Obama constantly making attempts to bail out the over leveraged house debtors.

Key Concept that many don't understand - our Banking system is a Fractional Reserve System
2. The Banks have built of Massive Amounts of Cash on their Balance Sheets thanks to Government Bailouts and Quantitative Easing.

If the Federal Reserve decides its in the Best Interest of the Economy - they will find a way to force Banks to put their ample supplies of Cash into the Economy - this Money will multiply - thats how a Fractional Reserve Banking System works
Banks can create More Money through creation of Loans and Credit

It may be challenging to understand - but, that's how our Banking System works.

If everyone understood what people in government were planning on doing--devaluing the currency and forcing pensions to buy worthless federal treasury bonds, everyone would cash out their pensions in lump sums and buy gold.

$80,000 pension in 10 years buys $40,000 worth of stuff.
$80,000 gold that could go up to $10,000/oz in 10 years buys $400,000 worth of stuff.

This is why people in government keep calling it a Recovery instead of a Relapse.

state says

austrian_man says

It is relevant because you brought up sulphur, mercury, tungsten etc. and asked why are we not considering them as money? I just gave you the historic reasons as to why humans believe gold is superior to other metals.

please provide a reason why the modern world should use a gold standard instead of a silver/platinum/mercury/whatever standard

Good question. Whatever we choose to use as money, it is desirable to have a high stocks to flow ratio. Gold is probably the highest of all metals in terms of stocks to flow. I think the ratio is like 80:1, annual production of gold adds a tiny fraction to what already exists above the ground. Therefore, it is a very stable barometer to be used as currency. Platinum on the other hand has a ratio of 0.05. This is the reason why we see wild price swings in platinum, because the added supply from production can cause the price to fluctuate widely. Not desirable, when we use it as money since prices in platinum for goods can have wild fluctuations.

Silver also has a high stocks to flow ratio and it has been used as money before. A bimetallic standard is totally feasible and desirable as well, since silver can be used for smaller denomination transactions and gold for larger.

xenogear3 says

If we are on gold standard, does your boss pay you gold? or is direct deposit ok too?
The financial system is different today than 1000 years ago. There is very little “cash” involved.

The payment system can be whatever works as the most convenient for employers, but the point is - you can exchange what you earn as payments into gold. As in you can redeem it. This is the way it used to be. $20.67 / ounce before 1934 and FDR came in, confiscated all the gold and revalued it to $35 /ounce. United States honored the obligation of gold-redeeming ability till 1971, Nixon came in and kicked us out of the gold standard. The debt tower has risen beyond proportions since then.

Dan8267 says

Gold is clearly a bubble just like housing was. And like all bubbles, it’s impossible to predict when it will pop close enough to profit from shorting it unless you have inside information. As John Maynard Keynes said, “Markets can remain irrational a lot longer than you and I can remain solvent.”

Depends on your perspective. Is gold in a bubble or is there a weaning of faith in the US dollar? Remember, the entire world runs on a fiat standard and it runs on faith and credit of the US Government. It would be prudent to watch what is happening to that.

Gold should be seen as an insurance against currency debasement. Plain and simple. It is not a loss when your gold is priced less in dollars, that means the dollars you own just increased in purchasing power.

Dan8267 says

That said, gold is riskier than housing because of two things. First, those who were serious about selling houses in 2007 when the housing bubble burst could have simply sell them for a modest loss. They choose to ignore the burst and thus suffered greater losses. When gold drops that won’t be an option because gold is far more liquid of an asset. That means that everyone can sell more easily and the price drop will be much quicker.

Do you sell your insurance? The reason you don't is because of future uncertainty. Same applies to gold, you don't sell it. You keep it because it protects your savings. It won't earn you any dividends, thats true but at least it won't lose purchasing power. It may even gain, depending on how crazy the governments print money.

It is a myth that gold tracks inflation.
It certainly didn't do that during the 80s and 90.

It goes up during the economical uncertainty.
And goes down during the normal time.

As long as the unemployment is 9+%, you don't have to worry about inflation.

xenogear3 says

It is a myth that gold tracks inflation.

It certainly didn’t do that during the 80s and 90.
It goes up during the economical uncertainty.

And goes down during the normal time.
As long as the unemployment is 9+%, you don’t have to worry about inflation.

In the 80s and 90s did you really have inflation in the US?
Look at the 70s. Since Nixon kicked us off the gold standard, the price of gold increased and peaked at around $800 an ounce in 1980.

The reason why gold price came down was because Paul Volcker raised the interest rates to a ridiculously high 20%. Dollars became very valuable and dear, gold came down. Think about this for a moment, does Bernanke really have this option to control inflation if it starts heating up the economy? Look at the US fiscal deficit/debt numbers and imagine for a moment what will happen when interest on this debt goes up!

The point is at the end of the day, gold performs well both during inflation and deflation. Gold was, is and will always be considered as a safe haven in times of economic uncertainty.

Note: I'm not saying gold can never be in a bubble, sure gold can get into a bubble phase when there is irrational exuberance about the metal. But we're far away from it.

Look at the chart in this link: http://truthingold.blogspot.com/2011/04/someone-please-explain-to-my-how-there.html

Only a tiny fraction of global investment money is in gold. When the masses start chasing gold, it will shoot the price to the moon. that's when we'll be in a bubble and its time to get out of gold.

state says

you mean when there are commercials for goldline on fox news and there is a gold buying store in every mall? and there are gold vending machines?

lol goldline on fox news has been on like forever..so i don't really look at that as a signal...I would be looking for signals just around me...so many people don't even understand why gold is the asset to be in right now..when everyone starts to 'get' the reasons and this tsunami of capital starts flowing into gold, it will get overheated.

there will be a bubble, but it is not right now. An excellent quote recently by a smart investor:

"The only gold bubble likely to burst is the bubbling ridicule of gold." - Don Coxe, BMO Financial.