Monday, March 03, 2008

Gold Remains Better Than Any Paper Currency

Many people all too often simply think of currencies in terms of one paper currency relative to others. While one certainly should consider that for several reasons, one shouldn't forget that there are better investment alternatives than paper currencies.

While I have long been (and continues to be) bearish on the U.S. dollar versus most other paper currencies that doesn't mean that I think those other paper currencies are the best investment choice. While the ECB for example pursues sounder policies than the Fed,their policy is onlky sound in a relative sense. The ECB too is inflationary in a absolute sense as they fail to raise interest rates despite the fact that inflation is well above their alleged "ceiling" of 2% and continues to rise. Instead, I have long argued that gold is a better investment alternative now that inflation is accelerating. This is in part due to the direct effect of inflation in terms of depreciating the real value of paper currencies, but even more importantly because of the indirect effect of increasing demand of gold as an inflation hedge.

Anyone who followed that advice would have earned a lot of money as gold is up more than 30% since then, from $750 to $984 per ounce. It will soon break above $1000, probably already this week. Yet that will not be the end of it. Remember during the 1970s, gold rose from $35 to $850, a 24fold increase. At $1000, gold is up only 4 times since the 1999 low. If Bernanke continues his current extremely inflationary policies, gold might very well increase 24fold this time too, which would imply a gold price of $6000 within a few more years.

I now see a story on Bloomberg News entitled "Growing Global Distrust Of Central Bankers" indicating that more and more people realize that with inflation accelerating, government bonds in general and U.S. government bonds in particular suck as investment alternatives and that gold and other commodities is the place to be for investors.The only question is why it took them so long to figure it out.


Blogger Flavian said...

You say:

"Anyone who followed that advice would have earned a lot of money as gold is up more than 30% since then, from $750 to $984 per ounce."

It is true that at the moment the price of gold is increasing at a higher rate than US consumer prices, but to say that anyone who followed that advice would have earned a lot of money is true only if you think that US dollars are money.

2:04 PM  
Anonymous Anonymous said...

Gold is good but just now highly risky.

Currently it is in a "Blow-off" (=verry overbought etc.)

When, finally the dollar gets an oversold bounce, gold will fall verry quickly along with commodities.

Göran, Sweden

4:39 PM  
Blogger stefankarlsson said...

Flavian: U.S. dollars are money, whether we like it or not. And gold has risen in terms of just about all currencies, albeit somewhat less than in U.S. dollar terms.

Göran: You have been bearish on gold and bullish on the U.S. dollar for quite some time now and although there have been short-term corrections in both the dollar bear market and the gold bull markets the trend have clearly been for a falling U.S. dollar and rising gold.

And although there will be more brief corrections, these trends will continue. If you want to continue to lose money with that strategy then go ahead and lose money. But don't say I didn't warn you.

6:11 PM  
Blogger Flavian said...

A drop in gold price is well possible but preconditioned by a a strictly non-inflationary US monetary policy.

However, there are absolutely no signs of a strict non-inflationary US monetary policy.

As long as Helicopter-Ben and his friends continue their destructive activities, gold will soar.

Gold is unelastic to demand and that's one of the greatest qualities of like.

I did not say US dollars are not money.

6:18 PM  
Blogger News Monkey said...


6:41 PM  
Anonymous troto, Poland said...

Anonymous: I think US dollar was good but now is highly risky!

1:31 PM  

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