Friday, February 25, 2011

Why Gold?

Ok, This one is for everyone who asks me "how high can Gold really go?"

The question is always phrased that way, and the more correct question is "How low can the dollar really go?"

The US dollar is money, just so long as there is faith in dollars. We call this faith currency. Those self-imposed power mongers back East call it legal tender, as if there were such a thing as "illegal tender" (which the laws and principles of Economic theory clearly state is impossible, for neither money nor debt have to exist at all in a healthy economic system- barter works just fine)

As monies go, Gold differs from dollars in that: so much as dollars are money as long as there is faith in currency, Gold is money so long as there is faith in money itself- that is: if things were to get so bad that people were unwilling to trade chickens for Gold, then I suppose the richest people on Earth would be chicken farmers....

Now, how does savings factor into all of this? Well, the money we save today, we intend to use tomorrow, right? We therefore need to rely on keeping our savings in a form that will purchase as much tomorrow as it purchases today. For this reason, the US Dollar completely BLOWS CHUNKS as an instrument of savings.

Today's savings are tomorrow's capital. So, let's expand on capital:

Chickens are consummable, and perishable- therefore they make miserable long term capital. Money (in any form) makes great long term capital because money is durable. Now, loop back to the point above about USdollars. If the only existent faith in US dollars is that they are money that will not purchase as much in the future as they purchase today, then ask yourself: should dollars be considered as good capital?

I hope you are shaking your head and saying "No Robert, they should not" because that is the right answer.

US dollars are best used TODAY to buy the chicken you need for dinner TONIGHT. They should not be relied on to ensure that you will still be able to buy a chicken for the same number of dollars two months from now.

To secure your future, you need a money that does not erode in value. A money that serves as a proxy for capital until the day that faith in money itself is lost.

Another way to look at it is that dollars (and other printed currencies) are fiat money, and money itself is fiat capital.

Money only serves as a proxy for the stored value of work- IE: If I work sufficiently hard and produce more than I consume, and I grant you that excess in exchange for something else, then that something should appeal to me as equivalent in value to the value of my work, right?

If you dream of the day that you will have enough money that you will no longer need to work, then you need to preserve the "work-proxy" value of your saved money. That should be a no-brainer.

5000 years of Human history (with the plausible exception of the notably brief period of 1981- 1996) tells us that one monetary instrument rises above all others in preserving its "work-proxy" value:


If you need a more "democratic" perspective- think of it like this:

The population of Earth is 6+ Billion, and half of these people are either Indian, or Chinese, and a very much smaller percentage are Americans and/or Malaysians.

Now, the Chinese and the Indians perceive gold as money, and they value Gold extremely highly (much more highly than they value their respective countries' printed currencies), so we have at LEAST 50% of the world's population in Gold's corner already, and the Malaysian's have the only Gold-backed currency on Earth at present, so they might have just tipped the Democratic scales to 51% of the vote...

Thursday, February 10, 2011

The missing piece of the inflation puzzle....

I don't know if you 've noticed, but food prices are acting like they just left the ramp on a ski-jump.

Corn, Rice, Sugar, Wheat, pork bellies, you name it... it's up in price.

But there is no inflation. Ben Bernokio (oops Bernanke) went before Congress again yesterday and soothed everyone's nerves again... prices are NOT rising on big screeen TV's, houses, cars, or yachts, so there simply is NO inflation.

Whew, I sure am glad I believe Ben Bernanke- after all, he showed his gifted Oracle prowess when he called the top in the housing markets, and when he assured us that Fanny and Freddie were well capitalized, and that Bear Stearns would be able to pay its liabilities...

Oh, wait a minute, that's right- Bernanke was 100% wrong on all of these- in fact he was perfectly 180 degrees opposite from reality.

Well, the more frequently wrong a person is about stuff, the better the odds are that they'll get something correct eventually, right? Maybe it's Ben's time to call something right, so let's all enjoy our $8 dollar flatscreen while we eat our $100 hamburger... Wait, I've got those numbers backward. ooops.

To actually give Ben some credit regarding inflation, there is one point I do agree with him on- we don't yet seem to be on the launchpad of a big jump in prices across the board because nominal incomes (incomes priced in dollars) are still not accelerating upward.

With the US population screaming at their congresspeople to take away Wall Street's bonuses, and with Wall Street actually off by a cool 500,00 jobs, and with the rest of the country languishing in 9% unemployment (18% if you use the pre-1970 calculation method) it seems that no one is earning any of the Trillions that Ben and his BFF's at the Treasury are creating like they had just discovered Gutenberg's little invention last week...

Ok, so if Ben's plan is to continue creating dollars, and relying on the fact that none of those dollars are going to end up in people's earnings or salaries, then where are all the dollars going?

Why is Wheat going up?

Why is Corn going up?

Why is Gas going up?

Why is Gold going up?

Have you seen the price of Copper? I have to imagine that the number of vacant foreclosed houses about to have the plumbing ripped out and sold for scrap is about to make a moonshot.

How can any of this be happening when there is no inflation, and no one is seeing any salary increases?

Well, it turns out to be simple. It's because people who own and sell Corn, Wheat, Gas, and Gold are simply not selling them for fewer dollars- they are holding them until a higher bid comes along; and with all those crisp new dollars floating around out there, higher bidders are not too hard to find.- especially when one bidder is JPMorgan ( the Federal Reserve's Bank) and another bidder is Goldman Sachs (the Treasury's bank). These guys are the "Primary dealers" that have access to the Fed's "Discount Window" ; meaning that they get those crispy new dollars handed to them through a drive-through window (they might even get fries with them, who knows?)- Either way, they have a sweet deal- The Fed says "take this new cash (that has not been circulated, so it has not been devalued that much yet) and as long as you buy US Treasury Securities with 60% of it, then the other 40% is yours to pump up the Stock Market and commodity markets."

Well, who wouldn't want fries with that? These guys are getting the same legal tender money, that you and I have to work for and earn, for free, and they are using it to buy the same things that you and I need to take care of ourselves and our families- namely food, gas, and industrial materials.

It doesn't sound fair, does it? Well it's not. So, why haven't you written your Congressman and Senators yet?

Look, if you depend on an income (as I do) to support your standard of living, then you've got two choices:

1) Keep earning the same number of dollars in a nominal sense, and stand by wondering why the grocery bill keeps rising closer and closer to par value with your weekly paycheck.


2)  Convert your dollars into currencies and monies that do not devalue as more and more of them are printed into existence.

Real income rates are falling- America is getting poorer. The cost of raising a family is increasing...

...And Ben Bernanke is doing the exact opposite of fixing the problem.