patrick.net

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.