The Goldwatcher

gold_ic-insert.pdf18th December 2009  Investors Chronicle article

Today’s Investors Chronicle features an article commissioned from me on ‘Gold : Price, Motivation, Timing & Strategy.’  The article  includes discussion on gold price prospects.  

This blog posting follows the I/C article, the 5th November Goldwatcher  posting Are Goldrush Prices Making Sense? and the associated September 8^th Goldwatcher posting  $1000 Gold : Here to Stay or here to Play.         

Gold isn’t a very interesting asset to own when the world is in good shape. But, sadly, as we all know, that’s not the case now. Our economies are still in an unholy financial mess. Compounding the economic problems Afghanistan has become ‘Obama’s War.’  How can we justify spilling more blood, maiming more troops and borrowing more money to prolong this disaster when all we have accomplished after eight years is boosting opium production to record levels, refinancing The Taliban and financing a corrupt government?  There is ample motivation for everyone to make gold an asset allocation priority now. 

Even in the worst of times and for millennia gold has kept its value. That’s why it is  the most enduring, best and probably the only asset to own as protection against Armageddon outcomes such as financial and civic disorder. In these situations, as carefully explained in The Goldwatcher, gold’s stateless money franchise ensures some security for you and your loved ones. But, to have this protection, you need to own physical gold. Not paper gold, shares in mining companies or shares in funds owning mining companies that won’t survive the crisis. 

The unholy financial mess that nearly ended with global financial meltdown in 2008 hasn’t gone away. It’s been aborted by global money printing on an unprecedented scale and there will be consequences.  If history is anything to go by our paper money currencies are on course  to becoming  worth less and less and they may eventually be worthless in years to come. Owning gold and other precious metals can also be motivated to preserve the purchasing power of our assets. But it’s not the only way of achieving this outcome. In most cases it also won’t be the best. Let me explain why. 

Pundits are comparing apples to potatos and tomatos.

Gold pundits proclaim that the dollar lost over 90% of its purchasing power since Roosevelt’s 1934 devaluation. But who keeps a dollar bill or a pound note for 76 years?  We spend or invest money. It’s true we will need $16 or $13 of 2008 money, depending which yardstick we use, to match the purchasing power of $1 in 1934. However it’s also true that over 76 years a comparison with the return on $1 gained from compound interest, even at the lowest ruling interest rates,  will leave gold looking sick. A comparison with investments in equities will leave it looking even sicker. 

Another patently flawed pundit claim is that assets revert to mean and, as gold peaked at $850 in 1980, it’s now set to  breach $2000.  As explained in the Investors Chronicle article $850 was a spike – a brief encounter that occurred against the background of events very different  to what’s happening in the world now. For one thing inflation then was in the double digits. Now we are fending off deflation No logical argument can be made for mean reversion to spikes. Apples can only be compared to apples.

Note added 19th December : Gold can’t beat checking account 30 years after spike

The Goldwatcher framework: 

The Goldwatcher was structured as an information  framework supporting analysis of events affecting the value of currencies and gold.  You can make your own decisions on whether or not owning gold makes sense and whether or not gold prices make sense at any time by addressing the questions associated with key Chapters and information resources in the book. 

The ten chapters contributed by me in Part One on ‘Demystifying the Gold Price’ and associated questions are: 

1: Introduction – Why gold? 

2:  The Gold Mining Industry – What gold price gives producers a worthwhile profit? 

3:  Gold Supply and Demand - Do central banks still need gold and does gold still need central banks? (NB to read this one now)

4:  The Rise and Fall of the Gold Standard – Did gold cause the great depression?

5:  The Dollar Standard and the Deficit without Tears – Is the dollar again America’s currency and everyone else’s problem? 

6:  The Economic Consequences of 9/11 and George W Bush – For how long will Asians go on lending for Americans to go on spending? 

7: The end of Cheap Oil, ‘Chindia’ and other Tipping Points to Instability – Will alternative energy come to the rescue? 

8:  Globalisation & Global Economic Rebalancing. Can the IMF avoid Global Financial Meltdown? 

9:  Gold Prices: Inflation, Deflation, Booms and Busts: Do Trees Grow to Heaven?

10: Investing Choices: What Gold? 

I will post comments on key developments affecting gold from time to time for various websites and publications. If you would like to be informed when comments are published or have any other queries please e-mail me johnnkatz@gmail.com. All communications will be answered.

Thank you for reading The Goldwatcher.

Seasons Greetings and good luck with your investments.

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