Monday, February 11, 2013

The Most Important Thing You Need to Know About Gold

In the video below, Mark Dice attempts to give away a gold coin to anyone who can tell him what the price of gold is within 25% of its current price. He then tries to give it away to anyone who can guess the price within 50%. No one comes up with an answer anywhere close.

Readers of EPJ are likely to know the answer and will likely be amazed at how many people are clueless, but this is an important lesson. Those who know the value of gold and its importance as a hedge against severe price inflation are few and far between. My guess is that the number of Americans that hold gold is under 5%. What happens if a severe price inflation hits and more people start to understand how gold protects against price inflation? The number of people wanting to hold gold is going to soar. That means enormous new demand for gold and gold coins. Just think about it, if those interested in owning gold climbs to 10%, 25% or 50% of the population, the price of gold is going to climb a lot faster then overall price inflation.

Fed massive money printing is going to make life difficult for many, but not those holding gold.



(ht Gary North)

22 comments:


  1. So from 1980 to 2001 we didn't have inflation?
    The annual close price of gold in 1980 was $594/oz and in 2005 the annual close price of gold was $513/oz. That seems to be a very poor hedge for inflation.

    Explain to me how I am wrong.

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    1. OK, it's actually a pretty good question. Maybe because during that time, the various bubbles (stocks, housing) were so outrageously profitable (for those who got out in time) that gold wasn't desired en mass. Also, central banks were dumping their gold onto the market big time. (think Gordon Brown).

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    2. Well there are a few things you need to consider.

      What is the definition of inflation? Austrians define it as an expansion of the money supply. The effect of inflation is rising prices.

      Unfortunately, most people only view "inflation" as rising prices.

      There is a huge difference between the two.

      I'm interested in why you chose those two dates because gold was certainly in a bubble in 1980. Its a false start point in my opinion.


      A better way to look at it might be the DOW/Gold ratio.

      It was near 1:1 in 1981 I believe. Its been creeping back to that since around 2000 when the DOW Gold ratio was 43:1.

      The best way to look at it is probably to consider the purchasing power of 1 ounce of gold over centuries.

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    3. lol... because in 1980 interest rates ran up to about 20%. you cherry picked a previous peak. In 1979 it was 200-300. That's how you're wrong.

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    4. Heres my thoughts on inflarion, tell me if Im wrong. Lets say proces increase on average at 2%. Thats lower than most optimistic estimates, amd would be considered by most to be so stable that the whole issue is moot. But thanks to the exponential function, wouldnt the doubling time for 2% be 35 years? And wouldnt that mean that even with "stable" and "irrelevant" 2% inflation would mean prices double every 35 years? And wouldnt that mean that workers would have to double thier incomes just to not take a pay cut in that time?

      Unless Im missing something, wouldnt even "minor" inflation make getting by and getting ahead very hard fot people? Would this explain why, despite increasing productivity (aided by computers, which make people more productive not less), the average wages in America have barely increased since the sixties (in terms of buying power)? And wouldnt that coincide with the closing of the gold window?

      No wonder the rich are getting richer and the poor are getting poorer.

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  2. Maybe because you cherry picked time frames?

    That was hard.

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  3. Well, you seem to have misplaced 7 years there.

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  4. The ignorance exhibited by these people is truly astounding. They're going to learn the hard way soon enough.

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  5. No one respects you when you simply take two data points and try to develop a trend.

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  6. If a significant portion of Americans want to hold value in gold or if it is re monetized its price would really jump. But you know exactly what will happen: a drumbeat attributing all sorts of economic damage to "gold speculators" or "gold hoarders". they keep their assets out of investment and commerce, that is why you are hungry. jobless and there are no govt revenues to pay for medical supplies at your hospital. They reuse dirty needles on you at the clinic because of the gold speculators. etc.

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    1. I find it ironic that many of the people who think gold is a relic and that owners of precious metals are tin foil hat-wearing nuts, are the same people who will blame gold speculators and hoarders for the looming economic implosion.

      Either gold is money or it's just a hunk of yellow metal. If it's the former, they should be backing up the truck and buying as much as they can. If it's the latter, how can its owners be responsible for the calamity that awaits us?

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  7. Most important thing?

    No.....counter-party......risk.

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  8. My point was that we had significant inflation for more than 20 years yet gold during that time was not a great investment.

    "Well, you seem to have misplaced 7 years there." I mentioned the price in 2005 and not 2001 because the 2001 price of gold was still only worth less than 50% of the 1980 annual close price. In 2005 it came close to hitting the 1980 annual close price. That means if you bought at the annual close price in 1980 it would have taken over 25 years to break even. That assumes there was no inflation during that period.....yea right!!


    "No one respects you when you simply take two data points and try to develop a trend."

    You could have picked any year during the 1980's to buy and gold would have been a dog as an investment. yea it was a bubble in 1980 but if it took over 20 years to deflate then that would not have been a good place to hedge for inflation. I'm not looking for respect, I'm looking for logic and reasoning not religion.

    My conclusion might be that there is no perfect hedge for inflation. If everyone were to perceive that there was a perfect hedge for inflation (think 1980 gold price) then that "hedge' may become wildly overvalued and thus would end being a perfect hedge. There is no eternally perfect investment or currency.

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    1. Of course there is no perfect hedge. Gold has been an excellent hedge since 1999, so nearly 14 years now. You also have to keep in mind that they adjusted the way the CPI is determined which means that inflation could be understated. Not only that, but massive bubbles were being inflated, dollars went into bonds, stocks, homes and so forth. Gold is a good hedge when governments are actively inflating bubbles. I don't know of any time in history where so many countries were actively devaluing their currencies like they are today. The fact that so few people own gold and yet prices remain so high should tell us something, gold isn't in a bubble. Can you say the same thing about the stock market and the bond market?

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    2. Well, Juslen, if inflation is UNDERSTATED by the CPI, then the "non-hedge" by gold is even worse before 1999.

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  9. "The best way to look at it is probably to consider the purchasing power of 1 ounce of gold over centuries."

    REPLY: Great so it's a good inflation hedge for the highlander Colin Mcloud who is immortal. But for us mortals with a limited life span we must be aware that we could end up buying gold and losing for over 20 years.

    "lol... because in 1980 interest rates ran up to about 20%. you cherry picked a previous peak. In 1979 it was 200-300. That's how you're wrong.

    So there is a time WHEN BUYING GOLD IS A BAD IDEA. There are times that gold will not be a good inflation hedge.

    What objective criteria will you employ to know when to sell your gold and move into something else? What point do you know gold is overvalued?

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    1. There are no objective reasons to buy and sell anything...ever, only subjective. You're arguing against a straw-man. If you say it is a bad time to invest is gold the question arises..."compared to what"? Can you think of anyone that would rather have 5 100$ bills from 1980 over an ounce of gold they bought at the 1980 peak?

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  10. This video was taken on the Oceanside Pier just a few miles from Camp Pendleton Marine Base.

    That reminds me... What do you call an overweight prostitute in Oceanside?

    A heavy marine layer.

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  11. As an employed person who is all talk, I intend on buying some precious metals one day as a way of diversifying my savings. Metals like gold will change in value, so I may loose some savings just like i would with paper money. However, my chamces of getting completely hosed will be much less, especially in a worse case scenario. There are no practical limits on how much paper and digital money can be created, or how fast that can be done, so there is no limit to how much spending power people can loose with that form of currency.

    Investing in gold might be not be a perfect solufion, or even a good one during certain markey periods. Still, gold has held some meaningful value all across the globe, across cultures, and for thousanda of years. So yes, you might loose some on gold, but you chances of loosing are slim, and the chance of gold bouncing back up are good.

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  12. re increases in price of gold - one must look at nominal interest rates v. rate of price inflation (along with other things obviously)

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  13. Wenzel leaves out North's conclusions upon viewing the video, that namely, the only reason to own gold is because you think you can exchange it for more FRNs than what you purchased it for.

    People don't realize gold is money or what it's relationship to the money supply is/or means.

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  14. is it any wonder we have who we have in the White House?

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