Tag Archives: Gold Articles

Gold is Good Money

ron paul

Last year the Chairman of the Federal Reserve told me that gold is not money, a position which central banks, governments, and mainstream economists have claimed is the consensus for decades.  But lately there have been some high-profile defections from that consensus.  As Forbes recently reported, the president of the Bundesbank (Germany’s central bank) and two highly-respected analysts at Deutsche Bank have praised gold as good money.

Why is gold good money?  Because it possesses all the monetary properties that the market demands: it is divisible, portable, recognizable and, most importantly, scarce – making it a stable store of value. It is all things the market needs good money to be and has been recognized as such throughout history.  Gold rose to nearly $1800 an ounce after the Fed’s most recent round of quantitative easing because the people know that gold is money when fiat money fails.

Central bankers recognize this too, even if they officially deny it.  Some analysts have speculated that the International Monetary Fund’s real clout is due to its large holdings of gold.  And central banks around the world have increased their gold holdings over the last year, especially in emerging market economies trying to protect themselves from the collapse of Western fiat currencies.

Fiat money is not good money because it can be issued without limit and therefore cannot act as a stable store of value. A fiat monetary system gives complete discretion to those who run the printing press, allowing governments to spend money without having to suffer the political consequences of raising taxes.  Fiat money benefits those who create it and receive it first, enriching government and its cronies.  And the negative effects of fiat money are disguised so that people do not realize that money the Fed creates today is the reason for the busts, rising prices and unemployment, and diminished standard of living tomorrow.

This is why it is so important to allow people the freedom to choose stable money.  Earlier this Congress I introduced the Free Competition in Currency Act (H.R. 1098) to permit people to use gold as money again. By eliminating taxes on gold and other precious metals and repealing legal tender laws, people are given the option between using good money or fiat money. If the government persists in debasing the dollar – as money monopolists have always done – then the people would be able to protect themselves by using alternatives such as gold that are both sound and stable.

As the fiat money pyramid crumbles, gold retains its luster.  Rather than being the barbarous relic Keynesians have tried to lead us to believe it is, gold is, as the Bundesbank president put it, “a timeless classic.”  The defamation of gold wrought by central banks and governments is because gold exposes the devaluation of fiat currencies and the flawed policies of government.  Governments hate gold because the people cannot be fooled by it.

Ron Paul

Why is Gold so Strong?

gold bar

Gold is a highly coveted commodity, but is the causal factor for the strength of the value of gold as simple as it being in high demand? The reason gold is so strong is a combination of factors including its popularity, its stability and its uselessness for anything much more than adornments.

The demand for gold is due to many factors and can be attributed to the fact that the demand for gold is not easily satisfied, giving it value because it is unattainable and rare. Gold is also unique in the fact that even after someone has obtained it, they still want more, with each acquisition being just as valuable. This is known as marginal utility, and this is a trait which gold shares with money – even though you have money you always want more, but you have to work hard to obtain it.

The marginal utility of gold has been high throughout history and most of the 155,000 tonnes which have been mined are still in existence. Despite this, we still mine for gold and extract what we can, making it the most hoarded commodity in the world. Silver was coveted alongside gold for some time, until it was discovered that this metal had industrial uses in photography and electronics for example. Similarly platinum has a price which is much greater than gold, but is not hoarded either, instead being used in industry, primarily in vehicle engines.

However, gold does not have a use which is sufficient enough to encourage us to part with it as an asset. Gold is also easily used as a currency because it is denser than most other metals, is immutable and does not corrode and this allows money exchangers to easily verify the authenticity. Gold is also the most malleable and ductile metal in existence which makes it easily divisible and has historically made gold a preferred metal for coins which cannot be counterfeited.

The Supply of Gold

The rules of supply and demand have proven that when there is an imbalance between supply and demand, prices adjust to correct it. This means that if demand exceeds supply, the price of a commodity will increase to a point where demand reduces due to affordability restrictions, or supply increases to take advantage of the demand.

This balance between supply and demand is always changing and so prices are always adjusting to compensate however, an imbalance has existing in the gold industry for some time because commercial demand is much greater than worldwide production. If this situation were facing any other commodity the prices of that commodity would soar. However, since gold is not consumed – but hoarded – this is not the case. Of the amount of above ground stock of gold, around 120,000 tonnes is available to source at any time. Plus, these stocks are increasing at a relatively rapid rate of around 1.7% each year with the largest annual increase in the last 50 years being 2.1% and the smallest of 1.4% and with advances in technology, the average growth rate of 1.7% per year is expected to continue.

Gold in Demand

Gold is in demand because of its safety as an investment with turbulent financial markets around the world. It is central banks, mutual fund managers, residents from developing countries and refugees of war who have been fleeing a panicked market in pursuit of gold investments. Therefore while gold is essentially useless because you can’t fuel your car with it or take it to the supermarket, this inanimate rock is seen as a safe haven for investments.

At the beginning of the 21st century gold was seen as a relic, and the gold price was just under $300 an ounce. Since then a change has developed in the gold and silver markets where demand is coming from the jewellery market, and from rural and agricultural demand from India, while in the developed world gold was bought as a supplementary asset and often played a complimentary role in jewellery alongside precious stones.

Despite the agricultural sector in India being relatively poor, 70% of the demand for gold came from this area to fulfil the cheaper side of the jewellery market and as financial security for newlyweds. Since food prices were not increasing, there was more income available to buy gold and in this instance the higher prices did not decrease demand.

In western economies gold made the transition from a cheap component of jewellery to an investment as it was turned into small bars and coins. The demand for gold had become a desire for wealth and a way to protect investments from the unstable money systems. Many institutions have also found they inadvertently invested in gold with the introduction of the gold Exchange Traded Funds which sold shares in gold mining companies to those forbidden from physically owning gold. The holdings of these trust funds places them as the fifth largest gold owners including central banks.

For central banks the pressure from politicians and bankers for a paper only currency with no holdings in gold has seen gold sold off, and sidelined as a form of money, which in turn increases the supply of gold. However, in 2007 the finance industry realised that gold was useful in counteracting the swings in the value of the dollar and Germany was the first nation to refrain from other European countries selling their gold. European banks eventually stopped selling entirely while at the same time China and Russia began buying gold assets at a rate to rival the central bank.

Gold is now recognised as a vital asset to have in reserve and higher gold prices have actually lead to higher demand and more buying. Gold prices, and silver, rise in relation to global financial uncertainty and as a result more and more investors are looking to gold, often for the first time. These investors are not seeking out gold to make a profit but to instead preserve the wealth they have in a safe asset.

The Strength of Gold in the Current Market

The value of gold is currently experiencing record highs of 1400.00 and silver is trading at a 30 year high of 27.50 and although the American dollar is strengthening, financial markets are finally taking notice of the situations in Europe. Germany is expecting bonds holders to carry some if not all of the burden from this point and while that is the intention of bond market, investors are distancing themselves from the debt surrounding a lot of Europe.

Where there is no EU baking, investors in Greece, Ireland and Spain feel they are not being adequately compensated for the risk they are taking with these debts and the spread between Irish bonds and the German bonds which are the benchmark is 550bp which is a new record. This now means it is cheaper to insure Iraqi debt than debt for Ireland.

However, the issue is greater than just the un-saleability of Irish bonds because just as the euro dropped four figures, gold surged ahead, being valued at more than EUR1000 which is almost on par with the all time high of EUR1051.40 which was reached at the height of the Greek financial crisis. The President of the World Bank Robert Zoellick has pointed out that gold needs to be once again used as an international reference point for inflation, deflation and future currency values, and that those countries with gold stores can benefit from these strong prices.

The Strength of Gold in the Future

While it is possible to estimate where the above ground stock levels of gold will be in the future in relation to demand from the fashion and jewellery industry, with more gold being held for monetary purposes its future value can be harder to ascertain. Gold investors will determine the value of their stores based on economic, political and personal factors to help them decide when to sell, and others looking to invest in gold for monetary reasons will use the same factors in their decision.

With such a range of variables dictating the price of gold, and factors which can be as fickle as an emotional urge or a political decision the future gold price is also measured against the US dollar, which is constantly changing, making the future value of gold hard to pin down. The value of the US dollar is dictated by changes in quantity and quality, however, it s true value is linked to the financial and political system which can be just as unpredictable.

If the future value of gold were to be considered for investment purposes, investors should be aware of the risks of short term commodities trading. The success of trading in commodities is dependent on knowing and understanding what others will be doing in the short term and a seemingly good investment can sell at a low.

Instead, investors in gold markets should not be doing so in search of a profit, but instead as a way to add security and stability to their investments when currencies are fluctuating and debt levels are uncertain and rising and a gold bar will be as solid in 20 years as it is right now.

Alban

Alban is a personal finance writer at Home Loan Finder, a home loan comparison website.

Why Governments Hate Gold

This past week several emerging and ongoing crises took attention away from the ongoing sovereign debt problems in Greece.  The bailouts are merely kicking the can down the road and making things worse for taxpaying citizens, here and abroad.   Greece is unfortunately not unique in its irresponsible spending habits.  Greek-style debt explosions are quickly spreading to other nations one by one, and yes, the United States is one of the dominoes on down the line.

Time and again it has been proven that the Keynesian system of big government and fiat paper money are abject failures in the long run.  However, the nature of government is to ignore reality when there is an avenue that allows growth in power and control. Thus, most politicians and economists will ignore the long-term damage of Keynesianism in the early stage of a bubble when there is the illusion of prosperity, suggesting that the basic laws of economics had been repealed.  In fact, one way to tell if a bubble is about to burst is if economists start talking about how the government and the Central Bank have repealed the business cycle.

The truth is the laws of economics are constant and real, no matter how inconvenient they might be to politicians and bankers.  This reality is setting in and the bills are coming due.  In the mean time, countries that have no money have bailed out other countries that have no money, except for the phony money created by politicians, bureaucrats, and their partners-in-crime at the central banks.  This may be preventing big well-connected banks from having to take on massive losses, but it is all at the expense of the taxpaying citizen.

As governments and central banks continue the cycle of spending and inflating, the purchasing power of their currencies is constantly being degraded.  These currencies are what the people are working for and saving.  This inflation guts the savings and earnings of the people, who have very limited options for protecting themselves against these ravages.  One option is to convert their fiat currency into something out of reach of central banks and government spending, such as gold or silver.

It is fairly typical in the midst of economic crises like these for gold to come under attack from Keynesians economists and their amen corner in the media.  The arguments against gold are usually straw men, based on a fundamental misunderstanding of the purpose of buying gold.  Gold is not a typical investment.  It is a defense against the predictable behavior of governments to debase a fiat currency under its absolute control.  The people who run the printing presses have trouble shutting them off.  In order to limit one’s exposure to this reckless behavior, it is wise to exchange unsound assets for sound ones.

As the foundation of their power, their fiat currency, is rejected or avoided, government power is compromised.  Fiat currencies trade the people’s freedom and security for the government’s freedom to squander the wealth of the nation on wasteful pet programs, wars, and corruption.  This is why the freedom of the people is so intertwined with a sound monetary unit.  This is also why the founders liked gold and silver, and supporters of big government hate them.

Ron Paul

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What’s REALLY Behind the Record Rise, Bull or Bubble?

By Nico Isaac

When prices in a financial market go from Sea Level to Outer Space in a relatively brief time, two scenarios are at work — and they both start with the letters “B-U.”

When a precious metal goes from being a popular long-term investment of buy-and-holders to the quick, get-away “vehicle” of day-traders, two scenarios are at work — and they both start with letters “B-U.”

And when the majority of mainstream pundits see a “new paradigm” in which prices continue to rise indefinitely, two scenarios are at work – and, you guessed it, they both start with the letters “B-U.”

Enter: the recent Gold Rush of 2009, when ALL of the above conditions apply. Everyone from hedge funds to housewives now hustle to hitch their asset wagon to the rising gold star. Which begs this question: Which of the possible two scenarios are at work: B-U-ll
— Or B-U-bble?

Here’s the difference: A genuine bull market is driven by a self-sustaining internal dynamic that’s reflected by a host of technical indicators. A Bubble, on the other hand, is the result of untenable psychology that could shift at any moment and bring prices plummeting down.

For long-term forecasts and more in-depth, historical analysis for precious metals, download Prechter’s FREE 40-page eBook on Gold and Silver.

It goes without saying into which category the mainstream experts put Gold: namely, a new bull market that has years, if not decades more to soar. “Gold Will Hit $2,000 an ounce,” reads an October 8 Market Watch. And — “Gold Has More Upside… The metal’s bull run is just getting started,” adds a same day Barron’s.

I found hundreds of news items which agree about the long-term potential for gold’s uptrend. But not a single one could tell me why the rally would continue, other than because the experts say so.
To know whether a diamond is real, it must cut glass. And, to know whether the bull market in gold is real, it must encompass at least one of these FOUR traits:

  1. A surge in demand that outpaces supply
  2. A falling stock market, which raises the “safe haven” appeal of precious metals.
  3. A real (not imagined) threat of inflation
  4. An increase in value relative to major foreign currencies

Right now, the Gold market can NOT check off a single one of these items. Case in point:

Supply: Demand for gold from jewelry makers – which comprises 60%-70% of the market – has plummeted to its lowest level in 20 years.

“Safe haven” appeal: From its March 2009 bottom, the U.S. stock market has soared 50% right alongside rallying gold prices.

Inflation: As the October 2009 Elliott Wave Financial Forecast (EWFF) notes: An increase in money supply is only inflationary if it is used to RAISE the total amount of credit. This is NOT happening, as both bank credit and consumer credit levels are contracting for the first time since World War II.

A gold rally in other currencies: Again, the October 2009 EWFF presents the following close-up of Spot Gold prices VERSUS Gold denominated in foreign currencies such as the Canadian dollar, the Australian dollar, the euro, franc, pound, and yen since 2007.

The major non-confirmation between these two markets is clear, as is the overlying message: IF demand for gold truly outweighed supply, then its value as measured in other currencies would increase.

The rise in gold is primarily the result of speculation and a falling U.S. dollar. These are exactly the “untenable” forces that contribute to a Bubble, not a genuine Bull market. The difference is only a matter of time.
For long-term forecasts and more in-depth, historical analysis for precious metals, download Prechter’s FREE 40-page eBook on Gold and Silver.


Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Towards Hyperinflation: A review of the gold market in the context of Western hyperinflation

gold_money.jpg

In the light of the surge in the gold price in recent
days, and the fact it has now held above $1,000 for
some time, I wanted to share this new report with you.

Paul Tustain, Founder and CEO of BullionVault, recently
completed a speaking tour of the Far East. His subject
was:

“Towards Hyperinflation: a review of the gold market
in the context of Western hyperinflation”

Anyway, he sent this report in PDF format to all his
clients (including me), and I felt it important enough
to ask him if I could make it available to my members
and subscribers – to which he agreed.

Given the seriousness of the present economic and
political situation, I believe it’s in your best interest
to give it a read.

You can download it immediately from this link:

http://alansmoneyblog.com/files/ebooks/Paul_Tustain-Towards_Hyperinflation.pdf

I hope you enjoy the ebook as much as I did.

Cheers,

Alan

Gold is Still Money

By Robert Prechter, CMT

The following article is excerpted from a brand-new eBook on gold and silver published by Robert Prechter, founder and CEO of the technical analysis and research firm Elliott Wave International. For the rest of this fascinating 40-page eBook, download it for free here.

Have you ever traveled abroad and taken a look at the local currency and wondered how the citizens of that country could take seriously what looks like “Monopoly money?” I’ve got news for you: You’re using the same stuff. Monopoly money is the money over which some government has a monopoly. It is the currency of the realm only because the state makes it illegal to use any other type.

Promissory notes issued by a state and declared the only legal tender are always doomed to depreciate to worthlessness because of the natural incentives and forces associated with governments. A state cannot resist a method of confiscating assets, particularly one that is hidden from the view of most voters and subjects. By extension, it is unreasonable to advocate a standard for such notes, which is simply a state’s promise that its currency will always be redeemable in a specific amount of something valuable, such as gold. A gold standard of this type is only as good as the political promises behind it, reducing its value to no more than that of paper. It could be argued, in fact, that a state-sponsored gold standard is far more dangerous than none at all, as it imbues citizens with a false sense of security. Their long range plans are thus built upon an unreliable promise that the monetary measuring unit will remain stable. Later, when the government’s “IOU-something specific” becomes, as Colonel E.C. Harwood put it, “IOU nothing in particular,” reliability disappears and the arbitrary reigns. Although the populace tends to retain its confidence in the currency for awhile thereafter, the ultimate result is chaos.

The only sound monetary system is a voluntary one. The free market always chooses the best possible form, or forms, of money. To date, the market’s choice throughout the centuries, wherever a free market for money has existed, has been and remains precious metal and currency redeemable in precious metal. This preference will undoubtedly remain until a better form of money is discovered and chosen. Until then, prices for goods and services should be denominated not in state fictions such as dollars or yen or francs, but in specific weights of today’s preferred monetary metal, i.e., in grams of gold. Anyone might issue promissory notes as currency, but the acceptance of such paper certificates would then be an individual decision, and risks of loss through imprudence or dishonesty would be borne by only a few individuals by their own conscious choice after considering the risks. Critical to the understanding of the wisdom of such a system is the knowledge that private issuers of paper against gold have every long run incentive to provide a sound product, just as do producers of any product. As a result, risks would be minimal, as the market would provide its own policing. Thievery and imprudence will not disappear among men, but at least such tendencies in a free market for money would not have the potential to be institutionalized, as they are when a state controls the currency. From a macroeconomic viewpoint, occasional losses resulting from dishonesty or imprudence would be extremely limited in scope, as opposed to the nationwide disasters that state controlled paper money has facilitated throughout history, which have in turn had global repercussions. As Elliott Wave Principle put it, “That paper is no substitute for gold as a store of value is probably another of nature’s laws.”

That being said, it is also true, and crucial to wise investing, that markets come in both “bull” and “bear” types. Being a “gold bug” at the wrong time can be very costly in currency terms. For nearly three decades, gold and silver’s dollar price trends have confounded the precious metals enthusiasts, who for the entire period have argued that soaring gold and silver prices were “just around the corner” because the Fed’s policies “guarantee runaway inflation.” Yet today, 29 years after the January 1980 peaks in these metals and despite consistent inflation throughout this time, their combined dollar value (weighting each metal equally) is still 40 percent less than it was then.

It is all well and good to despise fiat money, but it is hardly useful to sit in gold and silver as if no other opportunities exist. In contrast to the one-note approach, which has had an immense opportunity cost since 1980, competent market analysis can help you make many timely and profitable financial decisions in all markets, including gold and silver.

For more in-depth, historical analysis and long-term forecasts for precious metals, download Prechter’s FREE 40-page eBook on Gold and Silver.


Robert Prechter, Chartered Market Technician, is the world’s foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1977