I was reading an article by Jeff Randall from Telegraph.co.uk and he stated “When governments print money, buy gold…”The more I thought about it… the more it made sense.
There has been a lot of publicity recently about how investors are walking from their conventional assets such as blue-chip stocks and government bonds and turning to “Gold” even though on the surface it appears there is no upside to such a decision. Although the London stock market main index (FTSE-100) has lost 15% in the past 8 years the companies that comprise the FTSE-100 usually pay dividends often more then 5% per annum. Compare a 5% return to the 0% Gold pays presently… or the 0% Gold has paid throughout history… or the 0% it will pay in the future.

Again, I ask “why” are investors moving in droves to what they believe is security in Gold?

Could it be those “in the know” have lost faith in the world’s central banks and especially the United States Federal Reserve where the presses are spitting out new currency at a staggering rate? Some say the rising price of Gold is a result of the temporary anxiety of our current global instability… Gold is a safe haven in troubled times… but when has our home named “Earth” ever been a peaceful abode free from turbulence and uncertainty?

I believe what’s upsetting investors is not the wars in Iraq but rather the speed at which money is being printed by our governments. Last month (January 2008) BBC’s World Editor, John Simpson reported from Zimbabwe the cost of a meal for him and a few buddies was 290,000,000 Zimbabwean dollars… he left a ten million dollar tip. In this country’s economic state, as Simpson put it, “everyone is a millionaire, yet also, grindingly poor.” This is what happens when a currency implodes. Zimbabwe is the end of a journey that all overly wasteful administrations travel. Is the current price of Gold sending a warning that other governments, especially the United States is somewhere along a similar path?

Gold has been a store of value for more than 5,000 years… how many currencies have come and gone in that many years? Gold is rare… paper money is not. Inflation destroys currencies and the two most successful currencies, the US dollar and the British pound have each lost more than 95% of their value in the past 100 years. In 1971 President Nixon broke the US dollar’s formal link to Gold and since then the US has created trillions of “new” dollars out of thin air to enable Americans to pile up consumer debt to buy “essentials”. Still wondering why the US dollar is under attack?

By comparison the supply of Gold is finite.

Financial commentator Peter Burshre noted: “Regardless of the dollar price involved, one ounce of gold would purchase a good-quality man’s suit at the conclusion of the American War of Independence, the Civil War, the presidency of Franklin Roosevelt and today.”

“Practically all governments of history,” said Friedrich von Hayek, “have used their exclusive power to issue money to defraud and plunder the people.” Gold stands in the way of this process; it is a protector of property rights. Although some claiming to be “sophisticated” investors brush Gold off as “old news”, millions of “ordinary”. Investors know better. Some may recall an Adolph Hitler quote: “Gold is not necessary. I have no interest in gold. We’ll build a solid state, without an ounce of gold behind it. Anyone who sells above the set prices, let him be marched off to a concentration camp. That’s the bastion of money.” I don’t remember exactly how long the Third Reich was around but I do know that gold is still here.

Nothing keeps going “up” forever but to equal the November 1980 peak of $846 the price today would have to reach $2,500.

Author: Mark Pasay
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