Thursday, January 3, 2008

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 Programs food / grain purchasing power has been drastically reduced. So they need more money just to maintain their existing / basic programs.

8 comments:

Judith said...

What about abandonment of the "gold standard"? In my opinion, abandonment of the gold standard has been proven for quite a long time now (since the end of World War I in fact) as a sound fiscal decision because countries still on gold were being squeezed out of the foreign market by the sellers in countries with "paper" (depreciated) currencies, wage cutting, tax reductions, and similar measures availed little. Ultimately, these countries were drawn off gold. Other commodities and services had become more valuable than gold - the gallium used in the gallium arsenide dopants of high speed electronics, near infrared sensitive Charge Coupled Devices (CCDs) and the "celebrity antics" of Paris Hilton - are good examples. Though the latest trends in the financial world had convinced me that gold is a very good "safe haven investment" especially in today's heavily depreciated US dollar, high crude oil prices that's teetering on the brink of 100 US dollars per barrel plus the subprime mortgage crisis and the credit crunch in the US. Gold is now fast approaching the 1,000 US dollar an ounce (Troy ounce) mark but prices still need to reach a bit over 2,000 US dollars an ounce to repeat that historic all time high gold price in the first quarter of 1980.

Yvette said...

I've seen this particular blog at http://bonesbrain.blogspot.com . The ill - conceived bio - fuels program had really put a pressure on the UN's World Food Programme's ability to purchase wheat and run their aid programs. To me, gold will probably reach 1000 US dollars an ounce before 2008 is out.

Ringo said...

As of March 13, 2008, gold just reached 1,000 US dollars an ounce. Economic analysts say this is primarily due to the weakening value of the US dollar plus the all-time record high of crude oil prices now a little over 110 US dollars per barrel. The proverbial "Perfect Storm" has finally arrived. Plus food prices are also increasing constantly due to the ill-conceived bio-fuel industry hastily set-up by affluent countries, not to mention the wheat disease Ug-99 now posed to wipe out wheat harvests around the world. To me gold will probably reach 2,000 US dollars an ounce before the year 2008 ends. Will a 10,000 US dollar an ounce price for gold be not so far behind?

Lilith Fair said...

Looks like the ghost of the soap opera "Dallas" and that "Hunt Silver Debacle" as mentioned in our other blogsite http://bonesbrain.blogspot.com has returned to haunt us again in our turbulent 2008 global economy.
Presently gold, silver, platinum and even "that boring old" soybean futures have been snapped up as soon as they are made available to "greedy" commodities speculators. In 2008, we saw the never ending decline of the value of the US dollar while crude oil has reached a new record high plus the price of wheat going to the roof. Looks like everyone's jumping into the "Armageddon Bandwagon" i.e. investing in commodities like gold because of the resulting "US Housing Bubble".
If the Economic Stimulus Package must work, the US Federal Reserve will be pushed to print out lots of money despite inflation worries. Or the "FED" should try nationalizing the debt like what they did to Northern Rock in the UK. Will the direct intervention of the US Government to shore up housing prices alleviate the US economic turmoil?

Maribeth said...

Have anyone of you noticed how Paris Hilton will always be linked with the precious metal gold. I mean Paris' "marketable skills" are next to noneexistent - unless if you're referring to her amateur on-camera racially-charged "innuendo".
Times have changed, due to the strengthening US dollar, crude oil is now well under 120 US dollars per barrel after yo-yo ing to dizzing heights of almost 150 US dollars per barrel. Gold is now under 900 US dollars an ounce - 836 US dollars an ounce back in August 11, 2008 the last time I checked. Though compared to other commodities, gold is still a very good investment because this precious metal is a very tangible and concrete asset. Unlike those arcane mortgage backed securities and credit derivatives like credit default swaps which initiated the US subprime mortgage crisis in the first place.

Laurentz said...

Even though gold is now staying just a tad under 1,000 US dollars an ounce - usually between 970 to 930 - it still serve as a good store of value. As the world credit / liquidity crunch continues to bite, it seems like gold has become the primo safe-haven investment. Which inadvertently to the dismay of the Bush Administration Neo-Conservatives gave rise to the American fascination of Sharia Banking Laws and other related Islamic financial concepts.

Golda said...

What is it with Paris Hilton being inexplicably linked to gold? For better or for worse, gold will forever be an attractive safe-haven investment in times of recession / economic downturn. But I wonder if civilization-ending catastrophies will ever diminish the value of gold. I mean, has anybody done a research about how much gold was worth per ounce during the fall of the Roman Empire or during the Dark Ages? Has it ever went as low as 10 grems of wheat per gram of gold?

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