Wednesday, November 18, 2009

Incoming Train Wreck and Gold Prices

Found on PrudentBear, via Clayton Cramer:

The rise in the gold price above $1,100 per ounce last week is a pretty good indicator that something has changed. For 18 months, the gold price had been in a trading range topping out around $1,000. It has now broken out decisively from that range. The opportunity for the world's central banks to change policy and affect the economic outcome has been lost. The world economy is now locked on to an undeviating track towards another train wreck.

At most times, the gold price is not an economically significant indicator. In 1980-2000, it declined irregularly from $850 to around $280, and movements in it seemed to have had little or no effect on the global economy. That's what you'd expect; even at $1,000 per ounce, the global production of gold is only around $100 billion annually, which would put the entire world's gold extraction industry only 17th on the Fortune 500. When Gordon Brown sold Britain's entire gold reserves in 1999, at a price below $300 per ounce, it seemed a defensible decision. I went to a meeting in 2001 hosted by a diverse group which believed that the U.S. Treasury was conspiring to suppress the gold price, and my main thought was: why would Treasury bother?

However, in relatively few periods, gold becomes of immense importance. When investors lose trust in conventional currencies, because monetary policy appears set to debauch them, gold is the immediately available safe haven. During such periods, gold's former importance as a store of value becomes uppermost in the public mind, and its price becomes a major economic indicator.
The entire article is worth reading.  In a related vein:

NEW YORK ( -- Gold prices surged to record highs yet again Monday, topping $1,139 an ounce, as investors continue to favor the precious metal over currencies like the U.S. dollar.

Gold for December delivery jumped $22.50, or 2%, to settle at a record $1,139.20 a troy ounce Monday. That easily trounces the closing price for Friday, when gold settled at its previous record of $1,116.70 an ounce.

After the close, the price continued to move even higher in electronic trading.


I don't consider myself a "gold bug."  However, a couple things caused me to revise my thinking about gold and other precious metals:

  1. Comments by Fernando "FerFAL" Aguirre, author of the Surviving in Argentina blog.  He does have real-life experience with this, after all.
  2. Second-hand comments by someone high up the food chain at a major Wall Street investment firm, relayed to me through my accountant back in the Spring.
In my opinion PMs are worth serious consideration as a prep, not necessarily as an "investment" in the sense that they'll increase in value, but rather as a hedge against inflation and/or the drop of the dollar's value against other currencies, which will cause the cost of imported goods to rise.

Edit 11/18/09 at 12:38: I should clarify number 2, above.  The discussion was not about investment advice.  Rather it was about the state of the economy then and where we thought it was heading.

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