Reasons why you should own gold in your investment assets.

Big government statists who believe in Keynesian economics hate gold.  They write articles to persuade you not to buy the metal which has severed as money for most of the past 5,000 years.  Here is an article by Yale/Harvard trained Fareed Zakaria.  Mr. Zakaria is a current contributor to the dying Times magazine.

Precious metals are a crisis hedge.  There really is a crisis that is at the boiling over point.  The government debt crisis brought on by decades of Keynesian deficit spending is happening now.  They will print more money to attempt to stop the crisis money printing caused.  Keynesian central bankers and governments are pouring gas on the fire to put it out.  Mr. Zakaria is trying to convince you that it will put the fire out.

All that’s gold doesn’t glitter <http://globalpublicsquare.blogs.cnn.com/2011/10/03/why-gold-might-be-a-bad-investment/>

By Fareed Zakaria, CNN

What do Hugo Chavez and Glenn Beck have in common? The socialist/populist president of Venezuela and the right-wing talk show host often have strange ideas – just not the same ones. But it turns out, they are both gold bugs.

Now, many people have been investing in gold. But Hugo Chavez wants to horde it literally, physically. The Venezuelan government controls the world’s 15th largest stockpile of gold: about 365 tons. But, like most gold investors, it doesn’t really have that gold. At least not physically. More than half of Venezuela’s reserves are held overseas in London, New York and Zurich. If you ever visit the New York federal reserve, you can even see it in the underground vaults, neatly labelled as Venezuela’s.

You are not investing in gold if you do not take physical ownership of it.  Many people are trading paper promises in gold such as the gold ETF (GLD).  I don’t like Hugo Chavez, but he’d be wise to repatriate the Venezuelan government’s gold to Venezuela.

Mr. Chavez, as you know, doesn’t like the West; he doesn’t like this predicament. So he’s announced he wants his gold. But how do you transport 211 tons of gold across the seas? Well, by spending lots of money. You have to insure against a gold heist, like the one in The Italian Job <http://www.italianjobmovie.com/> . Experts say Mr. Chavez could spend at least 4% of the total value of his gold on insurance, with more on security and transport. Add it all up and you could get about half a billion dollars. That’s serious money for any country, let alone one that has negative growth rates as does Venezuela these days.

The Venezuelan government could transport the gold in a ship across the sea.  And they could pay for it with fiat money that their central bank could print to buy insurance against a heist.  Economic growth rates measured by changes in GDP is just another Keynesian aggregated number compiled by salaried bureaucrats.  It is true that the standard of living is going down in Venezuela, but it is due to socialism’s effects.  Keynesians believe that government spending adds to an economy.  In reality, government spending must come from the money that consumers planned on spending themselves or from the investments that individuals would have made themselves.  It doesn’t add to the economy; it just redirects money into unprofitable government programs.

What in the World is Hugo Chavez thinking?

Actually: He’s not alone. From the ancient times of Egypt’s Tutankhamun to the Gold Rush in the mid-19th century, right through to the modern day, we’ve always been attracted to gold. Who can ever forget the appropriately named Auric Goldfinger, from the James Bond movie, who said, "This is gold, Mr. Bond. All my life I’ve admired its color, its brilliance, its divine heaviness."

Mr. Goldfinger forgot to mention its rarity, divisibility, purity, durability, and portability.  These are some of the qualities that make good mediums of exchange (money).

There are many who share Mr. Goldfinger’s sentiments around the globe. especially in times of confusion and uncertainty about governments. People worry that governments are keeping interest rates too low, that will cause inflation and could weaken the dollar and other currencies.

There is a very real soverign debt crisis (read government debt crisis) at hand.  It is the result of decades of Keynesian economic policies.  Keynesians believe that government spending is productive especially in a time of recession/depression.  A free market in interest rates would be higher than they are now.  There will be massive price inflation when the commercial banks loan out their $1.7 trillion in excess reserves.  The dollar will continue to decline until the Federal Reserve stiffs the US Treasury at some point in the future.

The answer: Store Gold – something that has always been seen as a solid, substantial hedge against inflation. If everything else collapses, the theory goes, gold will hold its value. For this reason, in the last decade gold prices have risen more than 600%. Is this a rational response to legitimate fears of inflation? Or are we in the middle of a bubble?

Gold is only a crisis hedge (this includes massive price inflation like 20-30% per annum and hyperinflation).  Gold does not hedge against run of the mill FED inflation of 2-3% per annum.  There is a real crisis in the financial system and in government debt service.  There is no bubble in gold until the FED stiffs the US Treasury and causes a 1930-1933 deflation (aka the Great Depression).

There are signs that suggest a bubble. The fact is, global demand for gold in industry and jewelry has actually declined by 18% since 2004. And yet over the same period prices have surged. So it’s clear that the market is flooded with speculators who see gold as an investment, not as a usable currency or product.

The decline in demand for jewelry is no surprise.  This is basic economics.  If the price of a good such as jewelry goes up, then the demand for that good goes down (all other things being equal).  The price of gold is being driven up because there is a real increase in demand at the current prices.  Some investors realize that the price will continue to go up as long as the FED keeps creating digital dollars for bailouts.  I’ll save my defense of speculators for another article.  In short, they minimize price swings through their actions.  If you can’t wait, then read Walter Block’s chapter on speculators available for free at http://mises.org/resources/3490/Defending-the-Undefendable .

What’s really changed in the last few years is access. It’s easier to buy gold over the internet than it is stocks or shares. In places like Abu Dhabi and some European cities, you can buy grams of gold at ATM-style dispensers. All over the world, there’s a new Gold Rush. You switch on the TV and commercials warn you that the end of the world is coming and that you need to put your money in gold. Glenn Beck says that if you haven’t switched your savings to gold, you’re nuts. And Donald Trump is now accepting gold bars instead of wire transfers for luxury condos.

This is not true.  It is not easier to buy gold online; it is slightly harder because you usually need to use a bank wire to buy at good prices.  Buying a gold ETF like GLD is just as easy as buying stocks, but that isn’t buying gold that will be physically delivered to you.  The gold ATMs are so limited in distribution that they are just novelties at this point.  When they start showing up next to Redbox video rentals then maybe I’ll consider gold becoming a bubble.  There is a new gold rush because the crisis is going to be as bad or worse than the Great Depression.  Almost no one owns gold presently despite all the TV commercials.  It represents less than 1% of financial assets.  Donald Trump is wise to accept gold bars as payment.

I recommend that you own 20% – 30% of your net worth in precious metals that you physically posses.  If you have a net worth of $100,000, then that means you should own between $20,000 and $30,000 in precious metals.  I would keep 80% in gold and only 20% in silver.  Silver is much more volatile than gold.  Buy one ounce or tenth ounce gold coins printed by the mint of the country you reside in.  Your precious metals are not a hedge against inflation.  They are a hedge against massive inflation caused by a rapidly expanding money supply.  They are useless in a hyperinflation (which I don’t think will happen), but valuable in the aftermath to capitalize a business or to pay off debts by selling off a few ounces.

Most investment advisors will only advise 5% of your net worth at the maximum because they have no understanding of economics.  That leaves 95% in dollar denominated assets.  This is unwise.

This is bizarre. A lot of it is simply scaremongering. The truth is that for two and half decades, between 1980 and the mid 2000s – gold prices actually declined. Unlike many other commodities which actually have an end use – oil, minerals – gold is just a symbol, and as such its price rises have to do more with psychology and emotion than reason. So, when it falls out of fashion, the price could really collapse. The next time you watch Goldfinger or you hear of the antics of a Hugo Chavez or a Donald Trump, be a little wary.

The price of gold did in fact decline as price inflation rose from 1980 to the mid 2000s.  There was no perceived crisis then.  This is why it is only a crisis hedge.  Gold doesn’t hedge you against non-crisis levels of price inflation.  Gold is a commodity; it has an end use as jewelry, in electronics, and as a crisis hedge.  It is possible that it will serve as money again in the future, but even if it doesn’t it still has value and can be exchanged for other fiat monies (Yen, Dollars, Euro, Pounds, etc.).

The price of gold will go down during a deflationary depression.  When the FED ceases to buy US treasury bonds and (gasp!) sells some of its assets the money supply will fall.  A falling money supply is called deflation.  It hasn’t happened since 1933.  As the money supply shrinks many banks will collapse.  The small and medium sized banks will collapse because the FED won’t be bailing them out.  The biggest banks will probably survive because the FED protects them.  The dollar will strengthen in purchasing power and gold will fall.  Printed currency in your possession is king in a true deflationary depression.  Digital money in your savings, retirement accounts, and checking accounts will be disappearing when your bank dies.  There is no FDIC protect as this point in time (remember the FED stiffed the US treasury which funds the FDIC).  You should always have some currency at home in a safe with your precious metals.

Gold isn’t a stock with real earnings. It isn’t a bond with interest payments. It isn’t oil. It won’t help you drive a car; it won’t help you light a fire. Yes, you can wear it, but you can’t eat it. If doomsday really arrives, a can of baked beans might be worth a lot more than a brick of gold

We are in a bear market.  Many stocks will suffer a loss of real earnings.  Bonds are in a bubble.  Oil will decline in price until the banks begin to increase lending, then it will shoot upward with the massive price inflation.  US dollars won’t help you drive a car; they won’t help you light a fire.  Wait a minute.  US dollars might be useful for lighting a fire during a hyperinflation.  You can’t eat US dollars either.

You should buy storable goods that you will use or consume in the future now while prices are relatively cheap.  Once you have a good supply of storable goods in your basement or storage areas start consuming them and replenishing them in a rotation.  Do this before you buy gold.  Then buy gold and have some currency on hand.  Most people are in such bad financial shape that they probably shouldn’t own any gold because they haven’t taken care of their immediate needs first (such as water, food, and basic consumables).  A typical gold bar is 400 ounces.  The ultrarich might own a few bars, but no one else.  This is hyperbole.  Buy the beans now while their cheap.

Here is some of the Wikipedia entry for Fareed Zakaria who is the author of the article I just refuted.  http://en.wikipedia.org/wiki/Fareed_Zakaria  Yale and Harvard graduates are thoroughly schooled in Keynesian economics and Council on Foreign Relations one-world-government ideologies such as socialism and national socialism.  He is not an advocate of individual freedom and unfettered voluntary exchange.  He was born into the political class that has everything to lose when Keynesian policies fail.  Don’t forget this.

Early life

Zakaria was born in Mumbai (then Bombay), Maharashtra, India, to a Konkani Muslim family.[3] His father, Rafiq Zakaria, was a politician associated with the Indian National Congress and an Islamic scholar. His mother, Fatima Zakaria, was for a time the editor of the Sunday Times of India.

Zakaria attended the Cathedral and John Connon School in Mumbai. He received a Bachelor of Arts from Yale University,[1] where he was president of the Yale Political Union, editor-in-chief of the Yale Political Monthly, a member of the Scroll and Key society, and a member of the Party of the Right. He later earned a Doctor of Philosophy in political science from Harvard University in 1993,[1] where he studied under Samuel P. Huntington and Stanley Hoffmann.

Career

After directing a research project on American foreign policy at Harvard, Zakaria became managing editor of Foreign Affairs magazine in 1992. In October 2000, he was named editor of Newsweek International,[1] and wrote a weekly foreign affairs column. In August 2010 it was announced that he was moving from Newsweek to Time magazine, to serve as a contributing editor and columnist.[4]

He has written on a variety of subjects for the New York Times, the Wall Street Journal, The New Yorker, and as a wine columnist for the web magazine Slate.[5][6]

Zakaria is the author of From Wealth to Power: The Unusual Origins of America’s World Role (Princeton, 1998), The Future of Freedom (Norton, 2003), and The Post-American World (2008); he has also co-edited The American Encounter: The United States and the Making of the Modern World (Basic Books).

In 2007, Foreign Policy and Prospect magazines named him one of the 100 leading public intellectuals in the world.[7]

Zakaria was a news analyst with ABC’s This Week with George Stephanopoulos (2002–2007); he hosted the weekly TV news show, Foreign Exchange with Fareed Zakaria on PBS (2005–2008); his weekly show, Fareed Zakaria GPS (Global Public Square) premiered on CNN in June 2008.[1] It airs on Sundays at 10:00am and 1:00pm Eastern Daylight Time.

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Published in: on October 6, 2011 at 1:23 pm  Leave a Comment  

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