Why is Gold Lifting Off in a Non-Inflationary Environment?
I read a number of newsletters, some on stock trading, & others on the world economy in general – some in my family feel it’s all rather boring. Regardless though, here’s an article that I wanted to share, and hope you take the time to read. I will be posting some others similar over the next few weeks. Educate yourself as to what is really going on…..
By Alexander Green, Oxford Club Investment Director
Last Friday, the most actively traded gold futures contract on the New York Mercantile Exchange, for June delivery, hit an intraday record high of $1,249.70 a troy ounce.
In the investment world, gold is best known as an inflation hedge. Yet world central bankers are virtually unanimous that inflation does not pose an immediate threat in the West.
So what’s going on here?
Let’s start with a bit of history. A few thousand years ago, trade meant exactly that. “I’ll trade you my two pigs for your cow.” “Here’s a bushel of wheat for six dozen eggs.” “I’ll help build your barn if you’ll help me dig a new well.” This system was effective but not particularly conducive to economic growth. So money – coins with tangible value – was invented to facilitate trade. But gold is heavy and cumbersome. It was decided that it was easier and safer for the government to hold the gold and issue paper money (always backed by gold) instead.
Yet Uncle Sam cut its last link to the gold standard in 1971. It was discovered that more abstract forms of money are a powerful economic tool. In particular, unlike gold, money can grow. Government officials quickly recognized that they can crank up the printing press and create new money. In fact, even the press isn’t necessary today. During the recent financial crisis, for instance, the Fed conjured hundreds of billions of dollars out of thin air to refloat the economy.
Other central banks around the world did the same. This creates a rather substantial problem, however. The modern financial system only works as long as people have faith that all those ledger entries, those pixels and those scraps of green paper, represent actual value. Abstract money is an awesome thing, but only as long as people believe in it. (After all, the bills in your wallet have little intrinsic value.)
In short, gold is lifting off in a non-inflationary environment because people are rapidly losing their faith in government – and not without good cause. Monday a week ago, world equity markets soared on news that the EU had cobbled together a new $1 trillion bailout package to contain the fiscal problems in Greece.
On closer inspection, traders recognized this is a Band-Aid, not a solution. Equity markets slumped again. All the EU has done is taken from banks and other creditors the risk of holding the shaky debt of certain nations and transferred that risk to European taxpayers.
The fiscal problems in Greece – as in most industrialized countries today – arose from too much government spending. Yet European governments are trying to fix the problem by creating more money and promising to spend even more, if necessary. And some people wonder why gold is rising?
I’m not a doomsayer. I am an optimist by nature. And I know that you don’t want to hear a lot of political talk. I’m only trying to make clear the likely investment consequences. So let me get to the point.
Every investor needs to own gold. Not just as a hedge against future inflation, but as a hedge against government incompetence, shenanigans and inanity. You should own some physical gold – coins or bullion – and store it in a safe place. But you should also have at least 5% of your portfolio invested in gold shares.
Why? Number one, gold shares are an excellent portfolio diversifier. Historically, they have had a negative correlation with the broad market. (In technical terms, gold shares often zig when the Dow zags.)
Second, there are constraints that limit gold production. Significant new discoveries are rare. Virtually no new mine shafts have been opened worldwide in 24 years.
Thirdly and fourthly, India and China. These two countries contain well over two billion people. They are growing rapidly and the demand for gold there is high. Indeed, India is already the world’s largest market for gold consumption.
….. mmmmm, what do you think about this? This WILL affect your retirement!
As I always say “Take control of your destiny or someone else will”
May 18 2010 05:52 pm | Misc Ranting, Retirement, The Economy, Wealth Strategies, personal development
May 19th, 2010 at 4:23 am
[...] Why is Gold Lifting Off in a Non-Inflationary Environment … [...]
June 18th, 2010 at 10:52 pm
Gold rose to a record in London and New York as investors bought the metal to protect wealth from Europe’s financial turbulence.
June 22nd, 2010 at 5:51 am
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July 2nd, 2010 at 1:16 am
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