Loading...
Symbols:
Authors:

It's the End Of the World As We Know It and I Own Gold

by: Tim Iacono September 25, 2008 | about stocks: GLD    

Tim Iacono

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

There seems to be a good deal of confusion these days about the reasons why individuals should own gold.

Who owns gold?

While there's the "momentum crowd" - those who will buy anything that is going up or sell short anything that is going down - these folks are more traders than owners and don't really factor into the "ownership" discussion.

This leaves basically two groups of gold owners - those who fear a financial catastrophe and those who fear the debasement of paper money.

However you look at it, there's a lot of fear associated with owning gold.

It's the End of the World as We Know It and I Own Gold
The financial doomsayers seem to believe that the metal is some sort of insurance against the wheels falling off of the global financial system (or, perhaps, the outbreak of another major war ... or both), in which case, all your other investments are likely to go down the tube.

They often say, "Be careful what you wish for", making the incorrect assumption that everyone invests as they are told by Money Magazine with an 80 percent allocation for stocks (which, lately, seem to want to go down without any help from catastrophes).

The thinking goes that a ten or fifteen percent investment allocation for gold bullion might be of assistance in some way if things go horribly wrong - as it was immediately after World War II when no one trusted any country's paper money - and that, before providing this much-needed assistance, the whole thought of having it there at-the-ready might make you sleep better at night.

While this may be true, it's also true that, if you buy gold for this reason, you should probably load up on shotgun shells and 45 caliber rounds as well, since, under these extreme conditions, they might fetch an equal value in barter with the added benefit of being eminently more useful in protecting your other valuables.

As for the collapse of the financial system, some would argue that over the last ten days the global financial system is already collapsing around us, yet the yellow metal is worth only a little more than it was before the collapse began - hardly enough to make any difference in any post-collapse existence, though that could surely change very quickly.

While anything is possible, it's hard to imagine this kind of extreme scenario playing out anytime in the near future, but, if it does, you will surely be better off owning gold coins than U.S. Treasury bills.

"Muddle-through & Monetization"
The other type of gold owner sees the outlook for the world as being a little less dire with fewer banks, businesses, and governments failing and with much less loss of life.

If the doomsayers are once again disappointed and the world continues to revolve around its axis which becomes no more or less tilted, there is another very powerful argument to own gold - the debasement of paper money that will, for a while at least, forestall the financial apocalypse.

If we're lucky, we'll avoid the financial apocalypse all together.

This report by the Citigroup Mining and Metals Group is a good example of this line of thinking and more investors who currently do not count precious metals as an important part of their holdings should really take a cue from their work (here's the report(.pdf)).

They argue that owning gold can also be viewed as insurance against the government printing too much money in their herculean effort to somehow keep the wheels from falling off and the earth rotating about its axis.

Of all the possible outcomes from this point forward in the ongoing credit crisis, muddling through and monetizing debt would have to be the preferred outcome over Citigroup's other scenario - "Gloom & Doom" (see "It's the End of the World as We Know It" above).

Some might say that we're already well into the "Muddle-through & Monetization" scenario, having avoided the "Gloom & Doom" for years now, after the stock market bubble burst at the turn of the century.

Evidence of such is provided by the fact that, from 2002 to 2007, the gold price increased an average of 20.5 percent a year. Project this forward to the end of 2013 and you get a "Gloom & Doom" gold price of over $2,500 an ounce and nobody has to die.

Either way, gold owners come out ahead
Six or seven years into a gold bull market where prices have gone up for each and every one of those years (is there any other asset that can make that claim?), most people still don't understand why they should own gold. It's not because it's insurance against everything else tumbling down around you and, despite what traders think, it's not because the price has been going up.

The real reason to own gold is that governments are in the process of debasing their currencies in order to alleviate the pain of souring economies that were built on a fundamentally flawed principal - that more easy money can solve the problems created by prior easy money.

It won't.

In the long run, the only thing that easy money really does is make hard money more valuable when said hard money is measured using the easy money.

Gold doesn't have to go "parabolic" to reach $2,500 an ounce - a number often cited in the "Gloom & Doom" scenarios.

All gold has to do to reach $2,500 an ounce is to do in the next six years what it has done over the last six years.

The real reason to own gold is because the U.S. government and other governments around the world have been and will continue to try to remedy all known and perceived economic and financial market ills with their printing presses.

My guess is that somehow they'll be successful - at least for a while.

And just in case they're not, stocking up on bullets isn't a bad idea.

Related Articles

This article has 95 comments:

  •  
    Sep 25 08:29 AM
    Actually, it that Citi report is dated September 07, not last week, September 08.
    Reply
  •  
    Sep 25 08:43 AM
    Excellent reasons, Tim, to own gold. Good article. This bull still has years to run. Go Gold!
    Reply
  •  
    Sep 25 09:01 AM
    All one had to do (this morning) is watch CNBC with Jack Welsh on talking jibberish and you realize that what is going on in Washington is just an astute way of SEPARATING the public from its money.

    GOLD, SILVER AND, YES, BULLETS ARE THE ONLY SAFE BUYS NOW!
    Reply
  •  
    Sep 25 09:22 AM
    Gold and bullets, I would rather have bullets.....if paper becomes worthless what good is gold, you can't eat it, wear it, pay your mortgage, or even put in your car and drive with it.....@900 an ounce everyone is taking their grandmother's jewlery to the smelters, increasing the supply, and those who were buying gold rolex's are now out of the buying, like everything else it is supply and demand....bring on the pesticides and get rid of the gold bugs
    Reply
  •  
    Sep 25 09:24 AM
    maybe a golden gun w/ golden bullets is a better hedge
    Reply
  •  
    Sep 25 09:44 AM
    I suppose the same could be said for oil - it looks to me like it in some ways is replacing gold, at least for the short term. I do own GLD, but some days not sure why. Good article.
    Reply
  •  
    Sep 25 09:49 AM
    Well if you want to talk survivalism, then you want FOOD and bullets. You CAN eat food and shoot anyone who tries to steal it. However, try to buy the food with worthless paper money. Good Luck.
    Reply
  •  
    Sep 25 10:01 AM
    But what good is gold without a secret underground concrete storage bunker protected by pit bulls with friggin' lasers on their heads? Plus, if the stuff really hits the fan, you better have enough canned goods, seeds, and equipment to sustain yourself for the rest of your life. Otherwise, you'll show up to the post-apocalyptic market one day to buy food with your gold bullion/collector coins and your starving counterparts will figure out you have gold and kill you for it. In other words, as soon as you start spending your gold, the people who invested in bullets will take it from you. Thus lead is more valuable than gold!
    Reply
  •  
    Sep 25 10:06 AM
    Bullets, sure - would suggest .308 and .223 cartridges in addition to .45 and .22LR. Also booze and tobacco as well as more mundane items like soap, toothbrushes, batteries, etc. And, of course canned food, water purification tablets - though these are less for barter than for self-use. Think it can't happen here? Then you are no student of history. Conventional wisdom has it that it's reasonable to purchase insurance policies from companies like AIG but wacky to stockpile ammo. Hmmmm. Time will tell who was right. :)

    Quick comment on this clueless statement:

    "@900 an ounce everyone is taking their grandmother's jewlery to the smelters, increasing the supply,"

    Ummm....that doesn't increase the supply, Mr Genius. Mining gold increases the supply. I smell public schooling...
    Reply
  •  
    Sep 25 10:24 AM
    Repy to the wizard of Ozzy - it is still about supply and demand, more supply whether digging out of the safe deposit box or the ground, it is still supply, @900oz, so there is more supply than demand, you being a Yale proffessor, tell me what is gold used for in our current economy, I remind you there is no gold standard backing any major currency, so go ahead and hord your gold......I will sell you as much as possible at these levels....
    Reply
  •  
    Sep 25 10:30 AM
    What I smell is Ozzy is holding a bunch of gold @1,000oz....good luck unloading it....
    Reply
  •  
    Sep 25 10:30 AM
    Buy consumables. (The best inflation hedge in the times ahead !)
    Then, buy bullion. Gold is compact, very, very, very easy to hide, unless you're a billionaire.
    Then, if you have something left, buy miners.
    If you don't put up any signs like "Food & Gold Here", you will be OK.
    This is not the apocalypse.
    Reply
  •  
    Sep 25 10:37 AM
    Ozzy - So all those guys running AIG and Lehman all went to the same public school you attended? LOL
    Reply
  •  
    Sep 25 10:43 AM
    Good article, good responses.

    I am in planning stages for a new buggy-whip factory should the need arise. I'll make quintillions!!

    Got horse?
    Reply
  •  
    Sep 25 10:56 AM
    I think the Amish have had it right all along....you make the buggies, I will make the whips, we can use technology to clone horses...
    Reply
  •  
    Sep 25 11:03 AM
    at least you can eat the horse, cant eat gold...remember leather soup, never had gold soup....sell gold
    Reply
  •  
    Sep 25 11:07 AM
    Why so much pressure to rush this "fix"? Hmmm, for some reason I don't trust these guys. Call me paranoid. And the DOW goes up with people buying financials? Even Warren Buffet seems to be an idiot these days. But maybe he knows something the rest of us don't. Like the government is going to give him and Goldman our money. Gee, I don't have any money left. I bought gold and silver.

    I don't know how far the collapse will take us. How could I know? But I'm trying to be prepared for the coming events which surely includes an incredible inflation. In fact, we already have inflation--duh.
    Reply
  •  
    Sep 25 11:08 AM
    Currency will not get you safely across the border, gold will. Gold can be weighed and used as tender for everything. It has never been worthless.

    It has retained value through thousands of bankruptcies over the last 150 years. Like they say about the Stock Markets, hold them long enough and they outshine every other investment but that only refers to the Indexes not to individual stocks.

    Reply
  •  
    Sep 25 11:26 AM
    Inflation....or deflation....can't buy groceries from Alberstons with gold certificates....if the banks go under we are all stitched up anyways....In god we do trust...does he own gold?
    Reply
  •  
    Sep 25 11:31 AM
    people forget the 70's....
    Reply
  •  
    Sep 25 11:36 AM
    Gold has been considered valuable since time immemorial, can anyone believe gold can be so valued by every society, both past and present, because of prejudice or mistaken theory? Gold is the one asset you can go anywhere in the world with and someone will be willing to try to screw you out of it. "Short Gold" says sell, now. Every economic exchange needs sellers... even if they're wrong.
    Reply
  •  
    Sep 25 11:51 AM
    short gold, where are you putting your money?
    Reply
  •  
    Sep 25 12:01 PM
    Just as I was digging the foundations of my concrete survivalist bunker and pondering whether my reloading operation would contaminate my canning operation, it occurred to me that hoarding and hiding have never been optimal solutions right before a national meltdown. If you were a citizen of Russia 1910, Germany 1930, Zimbabwe 1985, South Vietnam 1972, and so on, and had the foresight to see a national disaster coming, the correct personal solution wasn't to hide and hoard, it was to get the hell out! Those who emigrated did much better than those who tried to ride out the difficulties. Those who waited until things got really bad didn't have the money to get out.

    So I'm filling in the bunker hole now. Later I will check the expiration date on my passport, sign up for a foreign language class or two, and invest in the foreign currencies I will need to make a fresh start. After all, the only reason I am alive today is because my ancestors fled Europe at exactly the right time.

    I will fund this preparation with soon-to-be worthless dollars. Perhaps a couple hundred dollars in collector coins could be usefult to bribe immigration officials, but speaking multiple languages and posessing business skills have always been more useful to immigrants.
    Reply
  •  
    Sep 25 12:04 PM
    I am taking it out of the mattress- and into the markets.....I buy value plays, gold to me is over priced when it jumped from 750 to 900.....I carry no debt and don't make loans.....I play the XLF's, always writing calls and own QID's to offset long term declines, again writing calls.....GE is a steal....yes they have financial exposure (ALREADY VALUED OUT OF THE PRICE), but they are world players in energy, transport, and own NBC.....5% dividend and they announced it will maintain thru 2009........my situation is much different than most, I have not owned any securties for the last 3 years....and invested in no real estate....there is a lot of pain out there.....and people are scared, when everyone is scared, look what Warren Buffet did, he caught the fallling knife, and he made a sweet deal....
    Reply
  •  
    Sep 25 12:10 PM
    Comment on those saying "you can't eat gold". etc. No, you can't, but you can sure get more for it in trade than you can with bullets and canned food. Doubt it? Go look at reports from Berlin in 1945. People used diamonds and gold to help them find ways to escape via gaining access to military and govn't transportation and even bribing Russians. Then after the war Nazis used these "hard assets" to gain passage out of Germany while someone with paper reichsmarks would have been laughed at. When the fiat money fails, gold is the money. I doubt they would have accepted 20 truckloads of spam and 12 cases of shotgun shells instead.

    And of course, completely ignoring Tim's column, they again go straight to a Mad Max world. You can get kicked out of your home and be homeless even w/o mayhem raging in the streets, guys. If you buy some significant amount of gold you're protected against hyperinflation. It won't defend your home from zombies for you. But it might mean the difference between destitution and getting by.
    Reply
  •  
    Sep 25 12:51 PM
    people long on gold are called "Gold bugs", why? hyperinflation ends up becoming deflation, then what happens to gold....this aint Nazi Germany
    Reply
  •  
    Sep 25 01:00 PM
    The last days of hyperinflation was 1979-80, I remember buying CD's that paid 18%, if you had bought gold then, you are now at break even.....there is no doubt gold is great hedge against hyperinflation and worthless paper money, but if that is the case, were all screwed.....
    Reply
  •  
    Sep 25 01:00 PM
    what's wrong with holding both bullets and gold at the same time? Short gold with rather have bullets and no money rather than bullets and money.
    Reply
  •  
    Sep 25 01:05 PM
    anyone who bought gold 3 years ago, did well, cash out and buy deflated assets, too chase it now is too late, im short short term....shoot me
    Reply
  •  
    Sep 25 01:22 PM
    Bruno,
    The gold hoarders of early 20th century Europe mostly had their gold taken away from them by someone who hoarded ammo. Therefore, lead is more valuable than gold! Whoever runs out of ammo last gets the gold! Everyone else goes to the camps!

    It's much better to be prepared to escape a deteriorating situation while you still can. A suitcase full of gold will only get stolen - you can't spend it on necessities. If you're worried about national decline look into Swiss banks, currency diversification, country diversification, foreign languages, and work skills that are sellable anywhere.

    These goldbug survivalist fantasies are fun!
    Reply
  •  
    Sep 25 01:55 PM
    Right on Chris....I remember people used to say "well they ain't making more land".....
    Reply
  •  
    Sep 25 02:10 PM
    short gold and chris, you should both look into DZZ. by your comments this is the beginning of a bull market for this etn. load up...
    Reply
  •  
    Sep 25 02:33 PM
    Buffet has some explaining to do, to those with the insight to follow what happen 5 Minutes before Buffet got that deal with Goldmans,all the I- Banks Stocks where down,then 5 minutes before Buffet got his deal,Goldmans Stock soared by $5,thats in money terms,is big for many that also bought Shares in that time frame,so insider info was being leaked for the Privledge Few?There is a trail,that will easly be exposed, & angry people with the whole damn system where insiders have reap billions in profits & others loseing every thing! This Trail will now be used,to Expose illegal insiders to the AG, & other State & Federal Law Enforcement! People want Heads & they may get some big ones! It was funny,that Buffet said he backed Obama,but when asked,if he was called by Goldmans,He declined to comment!
    Now to Gold,I don't play in any markets,but I study history & follow every thing going on in all sectors of the world,& it is a fact that Gold is money,& has been & will never go to zero,like so many Fiat money has gone before! Nixon servered all ties to the Gold Standard,setting up the Central & World Banks to work together,to Manipulate Gold & Silver,but they are running out of bullets,as more Nations are aquireing Gold to there Reserves,that tells me Gold is a place where Nations Protect them selfs, as many sane people are doing right now!
    Gold ,Silver,& Lead Bullets are all good to trade for Services, 90% Silver Coins have been used to trade for fresh fruit & Vegs in small towns where I live all Summer,so is Silver money? Yes!
    Reply
  •  
    Sep 25 02:37 PM
    despite the topic, this is the most intelligent financial conversation I have seen all day

    man, the masses are pissed but they don't even know, accurately, why

    thanks for the humor folks
    Reply
  •  
    Sep 25 02:53 PM
    DZZ - don;t like it, can;t write calls.....in another article I read "each share of the GLD trust nominally represents the value of a tenth of an ounce."....would that be 10x leverage.....risky business....the article also said US has $258,185,376,000.00 in gold reserves, USA sells Gold it will be down, again supply and demand...
    Reply
  •  
    Sep 25 03:02 PM
    Jim Morrison lives!
    Reply
  •  
    Sep 25 03:24 PM
    with Elvis...
    Reply
  •  
    Sep 25 03:24 PM
    They aint making more land, so where you gonna go. The other lands are presently occupied and I doubt they are going to welcome some broke american fleeing his broken country. Now if he had some gold they might let him in and allow him to start a business but if he only showed up with a gun and bullets they would probably shoot him and take the gun and bullets to be use on the next broke refugee that shows up with gun and bullets. GOT GOLD!!!!!
    Reply
  •  
    Sep 25 03:49 PM
    Very interesting exchange, everyone. I think Buffet LOANED out his money because OWNING equities doesn't look all that promising for who knows how long. There was a lot of talk 30 years ago that our currency was going to collapse. It hasn't, but it sure has dwindled away in buying power. In 1972, I brought home about $600 per month as a teacher. We had one child, bought a new car, and bought a house. I think we need all the insurance we can get, and gold and bullets are a good place to start.
    Reply
  •  
    Sep 25 03:58 PM
    They might welcome an American emmigrant with 250k euros in a Swiss Bank, who speaks the language, has no criminal record, and who has valuable skills and/or education. Europe, Japan, and other developed nations with falling birth rates might be happy to cherry pick the most educated and wealthy citizens of the old declining empire. That's the way immigration tends to work in any country.

    If you want to be able to escape when it all falls apart, the past is your guide. A suitcase full of metal will only get you robbed - perhaps even by the immigration officials if you make it that far!
    Reply
  •