MoneyTimes - December 21, 2011

Posted by Jill Kerby on December 21 2011 @ 09:00




There’s a very good reason why the Three Wise Men brought the baby Jesus gold when they visited him in that manger:  aside from being precious – and a suitable gift for a king – gold was a form of money and a medium of exchange. It was a very suitable gift for a family that was soon to be on the run from a very angry King Herod, who was determined to eliminate what he believed was competition for his worldly throne.

Last week, after the euro price of gold had fallen by about 5% or c€75 from its price at the beginning of December (it may or may not be down further – or back up - today) a neighbour asked me, “Are you one of those gold bugs?”  (Someone who believes in owning gold over all other assets. A ‘gold bull’ believes the future price is up; gold bears that it is going to go down.)

 “No,” I answered her. “I’ve no idea where the price of gold is going. But I do  believes that the paper and ink money we all use are going to turn into wallpaper some day, unlike real gold or silver.” 

I pointed out to her that the value of the euro – funnily enough - had also fallen by 5% against the US dollar and sterling since early December. “It’s not implausible that the euro could disappear altogether. These are very uncertain times and all asset prices have been falling.” I said. “But any gold you own is yours alone, and if you store it carefully, it’ll never disappear.  No central banker can devalue or debase it by printing millions of new bits of gold as they do with paper currencies.”

Gold, I added, tends to hold its spending value, even as the price goes up and down. Over the last 10 years its price movement has looked like a mini-rollercoaster – up and down and up and down, but still on an upward trajectory year on year. You can see this clearly in the historic price charts at www.goldprice.org.   Meanwhile, this is the exact reverse of the price performance of the major fiat currencies and even some of the major stock exchanges.

So why did gold fall so sharply last week? Partly because stock markets were tanking after the latest euro summit deal started to unwind (again). Experts explain that traders with margin calls needed to liquidate some of their gold, which is up 14.5% in US dollars over the past year (and 12.5% in euro) to cover negative positions, especially on the bets they’d put on the futures market in derivatives, that great ‘financial weapon of mass destruction’ that Warren Buffet warned us all about long before the 2007-08 crash.

As we know too well in Ireland, the value of assets like property, stocks and shares (held mainly in pension funds), wages and of course, jobs themselves and consumer confidence, have been going down steadily since the crisis began. Yet the sales of, and confidence in, precious metals has only increased since then.  In the past five years the price of gold is up by nearly 155%; over 10 years, its annualised increase is over 19% going from c$300 to $1,590 an ounce last Friday. It briefly hit $1,900 this August.

Is this it? Is the price of gold returning to $300 an ounce again? I’ve no idea. Gold certainly isn’t as cheap as it was when I first started writing about it in 2005, when it was about $475 an ounce, but developing countries like China and India and Indonesia are the biggest buyers of gold now, worried that the billions and even trillions of dollars and euro they’ve lent the indebted countries of the west (or that they hold in their own banks as the consequence of their favourable trade balances with the west) may not be paid back. Or, if they do get those dollars and euro repaid, our debased currency won’t be able to buy them as much as it did when they first lent it to us (as sovereign bond loans.)

Funny how no one these days – not just foreign governments - trusts what we in the west are doing with our money. 

The US Federal Reserve is still pumping money out to ‘stimulate’ its failing economy and financial system, but even at ludicrously low interest repayment rates investment and retail banks are not being overwhelmed with loan requests and those who do apply for loans – just like here - are turned down as bad risks.

Ordinary people aren’t queuing up to borrow either; they already have too much debt and their jobs aren’t particularly safe.  Anyone with savings and no debt is hoarding their money – to pay for austerity measures that are being imposed.

None of this is good for the integrity of our paper money but only people who are comfortable with the roller-coaster ride that is the gold/silver price should get aboard.  That said, no matter what happens to the price of gold in the short term, none of the features that have inspired the buying of it over the past 10 years have changed for the better in recent weeks. 

Many commentators are now saying that 2012 is the crunch year for the euro.  We’ll see.  Until then, it’s going to be quite a ride whether you’re a gold bug, bull or bear. 

May I wish all my readers and their families a very Happy Christmas and good news in the New Year.

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