The percentage of your investment portfolio devoted to gold will depend on many factors, with the health of the U.S. Economy at the top of list. At the time of writing this article gold has reached $975/ounce and could possibly double before this bull market ends. As a result of gold’s increase in value the precious metal has proven to be a profitable short term investment as of late. The question is how long will this last? There’s no sure way to know, but based on negative speculation in regards to the U.S. Economy and the declining value of the Dollar – gold could very well continue to be a good investment for the short term. And of course gold remains a great way of protecting your wealth while Wall Street and the Dollar suffer perilous circumstances. This article is written to extend my views on gold as initially expressed in ‘Dave Ramsey, Peter Schiff, and Decline of U.S. Economy.’
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Gold and Economics
In general gold is viewed as a lousy investment, often not even keeping up with inflation. Lately gold has made a come back largely produced by inflation and looming economic uncertainty. So having an understanding of economics and the role gold has historically played is essential in determining its market value. The relevance of gold to the global economy and as an investment vehicle is far from over.
In ‘Basic Economics – A Citizen’s Guide to the Economy’ author Thomas Sowell mentions gold many times as it relates to national economies. Sowell starts by comparing gold investing to Wall Street “taking inflation into account…..a dollar invested in gold in 1801 would by 1998 be worth just 78 cents. The phrase ‘as good as gold’ can be as misleading as the phrase ‘money in the bank,’ when talking about the long run. There have been many short-run periods when bonds and gold held their value while stock prices plummeted. The relative safety of these different kinds of investments varies greatly with how long a time period you have in mind (199).”
The strongest attribute of gold is its sustained value on global markets. If the U.S. Economy dives into the tank and the stock market suffers – your wealth would be protected with gold because of the its intrinsic value for making jewels and other uses industrially.
Law and Order
Sowell goes on to point out the role that justice plays in economics “the most basic function of government is to provide a frame-work of law and order, within which the people are free to engage in whatever economic and other activities they choose (238).”
When considering where to place your investments, a governments ability to provide law and order in practical terms will influence if investments can be made with confidence. When legal contracts cannot be enforced then investments cannot follow. For example, let’s say we invested in stock with a small oil company in Venezuela in 1998. At the time this may have seemed like a good investment with the company growing in market share and profits soaring. But in recent years we have seen President Hugo Chavez change the government into a Dictatorship and he had the State assume powers over energy companies. Putting the legal system in disarray, investing in the oil company no longer would seem valid since the government may ignore contracts at will. It would seem investors in Venezuela are probably placing their money in gold and foreign investments. Since the goverments enforcement of contracts is unpredictable, investing within the borders of Venezuela no longer makes sense.
In ‘Crash Proof – How to Profit from the Coming Economic Collapse’ author Peter Schiff speaks confidently of gold investments in Australia’s Perth Mint. The Perth Mint has been owned by the government of Australia for over a century. According to Peter
Unlike the U.S. government, which under the Gold Reserve Act of 1934 made it illegal for U.S. citizens to own gold, Australia has no such history (226).
Confidence in the continued reliability of Western Australia’s government to protect this asset and honor legal contracts as they are written will continue to make the Perth Mint a great place to harbor wealth outside the United States. However, never put all your eggs in one basket.
War
Economic uncertainty causes investors to look to gold. The War in Iraq is partly to blame for the rise in gold prices. War causes governments to print and borrow large amounts of money, which obviously leads to a spike in inflation.
This is why a major political or military crisis can send the price of gold shooting up, as people dump their holdings of the currencies that might be affected and begin bidding against each other to buy gold, as a more reliable way to hold their existing wealth, even if it does not earn and interest or dividends (Sowell, 227)
If tomorrow America were to embark upon the road to another Civil War – the price of gold would skyrocket as Americans moved what dollars they could out of U.S. stocks and into foreign markets and gold.
Gold and Banking
In the first half of America’s history gold and gold backed currency was used as money. Using gold and gold backed currencies protects wealth and prevents the government from taking spending on a roller coaster ride. Because of our gold backed currency the United States became the world’s industrial giant. Sowell describes this process
Both Americans and foreigners could exchange their dollars for a given amount of gold. Therefore any foreign investor putting his money into the American economy knew in advance what he could count on getting back if his investment worked out. No doubt that had much to do with the vast amount of capital that poured into the United States from Europe and helped develop it into the leading industrial nation of the world (295).
Even before the U.S. government destroyed our own currency by removing us from the gold standard and printing too much of it – gold was used by non-government backed banks.
Some banks used to issue their own currency, which had no legal standing, but which was nevertheless widely accepted in payment when the particular bank was regarded as sufficiently reliable and willing to redeem their currency in gold (Sowell, 226).
In 2007 a ten year old company in the U.S. called Liberty Dollar had a successful business issuing gold backed currency that competed with Federal Reserve Notes. However, the FBI raided their vault taking all the gold, silver, and platinum they had in stock. Company information says
Von NotHaus developed the Liberty Dollar in 1998 as an “inflation-proof” alternative currency to Federal Reserve Notes. The U.S. government, however, historically has taken a dim view of anything monetary that could be perceived as substituting for Federal Reserve Notes. Authorities have attacked such alternatives as counterfeiting, while supporters of such bartering tool attack the Federal Reserve Notes as fakes.
The owner of Liberty Dollar issued this response
Dear Liberty Dollar Supporters:
I sincerely regret to inform you that about 8:00 this morning a dozen FBI and Secret Service agents raided the Liberty Dollar office in Evansville.
For approximately six hours they took all the gold, all the silver, all the platinum and almost two tons of Ron Paul Dollars that where just delivered last Friday. They also took all the files, all the computers and froze our bank accounts.
We have no money. We have no products. We have no records to even know what was ordered or what you are owed. We have nothing but the will to push forward and overcome this massive assault on our liberty and our right to have real money as defined by the US Constitution. We should not to be defrauded by the fake government money.
The U.S. government no longer desires a gold backed currency although many citizens do. A gold standard restricts the creation of credit as Sowell accurately states “The big problem with money created by the government is that those who run the government always face the temptation to create more money and spend it…….For this reason, many countries have preferred using gold, silver, or some other material that is inherently limited in supply, as money. It is a way of depriving governments of the power to expand the money supply to inflationary levels (225).”
The Future of a Gold Standard
In 1966 Alan Greenspan wrote ‘Gold and Economic Freedom’. He stated
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. here is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to covert all its bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
The real question is can a discretionary paper currency managed by Central Bankers perform as well a gold standard? So far it seems successful. However, a gold standard prevents the booms and busts seen in our present economy as a result of Central Bankers attempting to control the economy by expanding credit to provide a steady increase in growth. The problem is that this policy encourages borrowing and consumption instead of savings and production.
The future of the discretionary system has yet to be put to the test. Sowell describes the changes that electronic transfers of money have brought about. Governments inflating their money supply too rapidly could lead to large percentages of wealth being transferred out of the country instantly. ”The discipline this imposes is different from that once imposed by a gold standard, but whether it is equally effective will only be known when future economic pressures put the international monetary system to a real test (Sowell, 296).”
In ‘Crash Proof” Peter Schiff believes that a gold standard will return – either through governments or private citizens in an open market. Schiff states that the upcoming collapse of the U.S. economy and dollar will open the eyes of citizens to the failings of a currency based on pieces of paper backed by nothing.
How to Invest in Gold
If you are planning on investing in gold contact the staff at Euro Pacific Capital, this is Peter Schiff’s investment firm.
Gold Coins
Physically owning gold is one way to invest. Purchasing a Krugerrand (South Africa), Canadian Gold Maple Leaf, or American Gold Eagle Bullion Coins is one way to physically own gold. At a current price of $1,000 the actual value of the gold metal in these coins by weight can quickly become worth more than the price of the coin itself – if the price of gold continues to rise. The American Gold Eagle Bullion Coin contains one ounce of gold.
Gold Bullion
Bullion can be purchased from The Perth Mint. From The Perth Mint website “Investors who do not want the inconvenience and risk of storing their precious metals can take advantage of the investment products that The Perth Mint has developed. These products allow investors to buy gold, silver and platinum via its Certificate and Depository programs or to buy gold via the Australian Stock Exchange. Alternatively, The Perth Mint manufactures a wide range of bullion coins and bullion bars for those who prefer to store physical precious metal themselves.” There are other places to purchase bullion so do some research and find the method that suits your concerns.
Gold Mining Companies
You can buy stock in Gold Mining Companies. This is a good idea since gold mining has been very slow until recently. With the price of gold going up the demand for mining will increase accordingly.
Related Articles
* Dave Ramsey, Peter Schiff, and the Decline of U.S. Economy
