Friday, December 21, 2007

Should We Be Investing in Gold

For the last 30 years or so, it’s a well-known fact that as the value of the US dollar decreases, the price of gold increases. In today’s post-US sub-prime mortgage economic climate, does it still make good fiscal sense to invest in gold?


By: Ringo Bones and Vanessa Uy


As the price of oil draws ever closer to the 100 US dollar-per-barrel mark, is our present (fiscal year 2007) global economy fast becoming into the economic climate that existed in 1980? Even though there are similarities like the Federal Reserve reigning in on credit and interest rates, the tumultuous political situations in the Middle East. The US$100 in 1980 is still higher in value after FTC algorithm-inflation-adjustments compared to US$100 circa-2007. Armed with this data, will the price of gold do a 1980 era repeat of reaching over the US$800 per-ounce price range?

With an aspect of Sharia Banking Laws fast becoming into vogue in Western financial sectors like the idea of financial institutions should only honor “concrete” or “tangible” forms of collateral, the lure of investing into precious metals –like gold- had recently become the hottest trend in high-yield investments. But the precious metals market is by no means strictly infallible and not immune from unlawful market manipulation. If anyone still remembers-or cares- about the “Hunt-silver debacle” will surely attest to this. At the beginning of the 1970’s the Hunt brothers – heir to the multi-billion dollar fortune of Texas oil/petroleum tycoon H.L. Hunt used their billions to purchase and hoard silver in an attempt to increase the price of silver to be comparable to that of gold. But near the end of March 1980, the Hunt brothers, along with a major Wall Street firm and U.S. securities and commodities markets came almost to the brink of financial disaster. Even though those were different times back then, if most of today’s current billionaires will do a “stunt” similar to what the Hunt brothers did -but to gold- the price of gold could reach US$10,000 per-ounce.

Our current allure of gold and its related retinue of precious metals, stemmed from the US sub-prime mortgage crisis that became news by the end of July 2007. During the succeeding months, the fallout of the US sub-prime mortgage crisis affected the global currency market – with their anchor – the US dollar weakened by inflation due to the Bush administrations current quagmire in Iraq. (At an average cost of US$1billion-per-week, it does seem like Uncle Sam is setting up a colony on a distant earth-like planet orbiting the star Alpha Centauri). Bonds and conventional bank savings accounts quickly lost their appeal as inflation drained their purchasing power. So investors and their dogs everywhere quickly began to turn to the oldest stores of value they can find – gold and related precious metals.

The novice investor may ask: “Why invest in gold?” Well, since the time paper money gained widespread appeal. These “paper money” –by common sense- should be worth just about or lesser than the paper on which it is printed on, unless the paper money’s value is backed-up by “tangible” or “concrete” assets namely gold, silver or the other related precious metals. But it is mainly the “gold standard” i.e. a monetary standard under which the basic unit of currency is defined via a stated quantity of gold circulating freely into the international financial system, hence the term “bank notes”. The reason we expend an almost excessive amounts of our mining expertise in obtaining this rare but almost useless metal, which even in “gold rush” days involves the “processing” of a ton of ore just to get 17 grams of gold. At present, even “processing” a ton of ore just to get 3 grams of gold is considered very economically viable. And also, it is because gold is what makes our paper money able to buy things i.e. purchasing power. The other uses of gold is in the jewelry industry, dental “bridgework” and electroplating electrical / electronic components to make them corrosion resistant.

While platinum is far more useful than gold and the gyroscopes of modern bombsights are made from it. Unlike gold or silver, platinum doesn’t occur in its native state in nature i.e. free elemental form. Platinum, and its related metal siblings on the Periodic Table namely rhodium, iridium and palladium are usually refined via proprietary chemical process that is a highly guarded trade secret. Usually a batch of beige - colored mud (ore concentrate) is added with a “secret” chemical mixture to obtain the pure metallic platinum and its metal siblings.

A lesser known metal that is more useful expensive, and rarer than gold is gallium. The main user of gallium is the electronics industry where it is used in making semiconductors with high switching speeds and “solid state” night-vision goggles. Without gallium, the green-tinged Paris Hilton Sex Video would not have been possible. Yet gallium plays no part in backing the value of our paper currency.

So what does this all mean? Being closeted –but fiscally challenged – philanthropists that we are. We do believe in charity –only during those times that we are practically overflowing with money. We’ve read “The Politically Incorrect Guide to American History” by Thomas E. Woods, Jr., Ph.D.. And the part of that book that really speaks to us is about how charitable giving grew at a faster rate during the 1980’s, described as “the decade of greed” (after the movie “Wall Street”?). Statistics had shown that charitable giving during the 1980”s really grew at a faster rate than it had during the previous 25 years. A really “scary” proof to the saying that: “greed is good”. Because of this, its now in the best interest of major charitable organizations like Oxfam and the UN Food Programme for us to “become rich”. With skyrocketing grain / staple crop prices due to the hastily set-up biofuel industry, the United Nations Food Programme's food / grain purchasing power has been drastically reduced. So they need more money just to maintain their existing / basic programs.

5 comments:

Maribeth said...

To me, investing in gold - on the grassroots/individual consumer/client level - is fiscal pragmatism par excellence. Especially those of us buying (in sensible quantities I hope) 18 Karat gold jewelry that can easily serve as "pawnshop collateral" during "rainy days". Also this coming Boxing Day - as the British refer to the 26th of December - debt counseling firms like Green Path Debt Solutions will be up to their necks with clients attoning for their Christmastime spending sins. And finally, do you think the Federal Reserve's deciscion to adopt the policy laid out by economist John Maynard Keynes eventually solve the current US credit crunch / sub-prime mortgage crisis that is now threatening the global economy?

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Apple said...

I've heard about the Hunt Brothers story about holding silver back in 2003 after watching about a documentary about the TV series "Dallas" (this was before I was born but my mom is a fan of it back in the early 1980's). The Hunt Silver Debacle has even been compared to the drama revolving in the "Dallas" TV series. Even though silver is considered by many as "the poor man's gold", the latest news in the business and finance world has shown that silver prices has been increasing steadily near the end of the 2007 fiscal year.
Speaking of celebrities, did you know that Britney Spears during her heydey used to contribute about 120 million US dollars annually to the American economy via album releases, product endorsements and paparazzi pictures. Maybe she should work with Federal Reserve chairman Ben Bernanke about a "plan" to save the American economy from falling into recession. To me, this is the closest thing we have of fulfiling the Medieval Alchemists dream of turning base metals into gold.
P.S. Does this blog also appears at http://boneseconomics.blogspot.com ?

Yvette said...

Unfortunately, I'm old enough to had witnessed first hand that famous TV Soap Opera "Dallas" back in the 1980's before becoming a full-blown "Trekkie" when Star Trek Voyager came out . Dallas alumnus Kate Mulgrew who played Captain Janeway on Voyager is one of my favorite actors because my friends said I looked like her.
Back to silver and gold, I think gold will probably reach 1000 US dollars an ounce before the year 2008 is over because of the continuing economic slowdown in the US (Sub prime mortgage and credit crisis). While silver's future will be uncertain due to the rapidity digital photography came into the market. So who needs the silver for chemicals to be used in film based photography anymore? Probably a plague of werewolves in Iraq and Afghanistan will certainly cause a dramatic rise in silver prices. The falling value of the US dollar, high crude oil prices now over 100 US dollars a barrel, plus staple food prices increasing rapidly due to increased demand for bio - fuels has made gold a defacto safe haven investment.

Hera said...

The "Hunt Brothers Silver Debacle" really did mirror the ficticious going-ons on the TV soap opera Dallas. Remember that "Who Shot JR (Ewing)" episode that aired on March 21, 1980? Our currently renewed obsession with precious metal commodities investing especially gold and silver rekindled my memories of the hugely popular (during its time) soap opera Dallas- which unfortunately I'm old enough to experience first hand. Who could forget Kate Mulgrew as her role as the Country Singer Garnet McGee on Dallas and her latter role as Captain Kathryn Janeway on Star Trek Voyager.
In accumulating silver, Bunker and Herbert Hunt had used a tool employed by nearly all commodity traders - margin, or loans backed by the commodity itself as collateral. When all goes well, margin enables a trader to increase his or her profits enormously. When the market goes the wrong way, however, it can put him or her in a deep hole. Judging the way our current global economy is going, a 10,000 US dollar an ounce price for gold is fast becoming a reality. Though at present (March 14, 2008) gold is still a little over 1,000 US dollars an ounce. It's no longer a matter of if gold reaches 10,000 US dollars an ounce but when given the number of existing "billionaires" around the world who will be tempted to resort to hording and commodities speculation - an unscrupulous method employed by the Hunt Brothers back in the 1970s.