The Case For Gold

By | August 19, 2018

Gold and Silver and the rest of the precious metal are usually viewed as a hedge against inflation and a long term alternative storage for your money, vs the fiat currencies.

Let us look at the price of gold in this chart: http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart,

and the interest rate in this chart: https://fred.stlouisfed.org/series/FEDFUNDS.

Couple of things that are clear. One, like real estate the price of gold can go down.  Two, there is not definite correlation between gold and interest rate, and inflation indicator.

From the 1980 to 2000, the correlation existed on the long term average and as the interest rate went down the gold price went down. But from 2000 and up, it seems that correlation is no longer there.  Even now, late in 2018 as interest rates are rising the gold price is going down and it just dipped below $1200.

However, I do think that the better comparison is the gold prices and gold. For that, I am going to consider paper gold, i.e GLD ETF and compare that to the dollar index. The reason I used the ETF is two fold, (1) it has pretty good correlation with the actual price of gold, but remember still and ETF.  (2) – it is really the largest gold ETF and probably the only way an investor can bet on gold prices, unless you want to pay $30-50 premium an oz each time you get in and out.

The above is the dollar index over the last 10 years.  We can see the plateau part and then increase, decrease and increase up till now.

Now let us take a look at the gold price, from 2009 till 2012 it was rising despite the fact that the index did not move much.  The same from 2012 – 2014, no motion on the index yet the gold price went down.  From 2014 to 2017 the index has risen and the gold prices went down, only in general sense.  Also from 2018 to now the index has been rising, and the gold is getting cheaper, in a general sense.  So there is some better correlation but it is not really “guaranteed bet”.  There seem to be some confounding parameter(s) to the relationship between gold prices and the dollar index.

The last kink in the the curve is pretty interesting since the interest rate were rising and the dollar index was rising yet the price of gold went up rather than down.  So, for me, until I figure out something a bit more concrete I might buy gold but I am not going to trust that it will go up.

The precious metal advocates will tell you that the price of metals is being manipulated by either governments or bankers. And, although the existence of “paper” precious metals can do so and the actions of particular government can also greatly impact these prices, but that means the thesis of owning precious metal no longer holds.

The precious metal advocates wants you to won these metals and hold them physically.  What good is that if the prices of what I hold is controlled by the same people that control the currencies that I am trying to avoid exposure to! 

Another important reason for holding the physical metals is bartability in the SHTF scenario. Well, if the price of gold sky rocket, how am I going to pay for loaf of bread using 10k ounce of gold or $100 onunce of silver?  I do not think grocery stores are going to take metals for payments. I do not think running around with grams of precious metals is practical either. Very few people are savvy enough to be able to ascertain that your gold or silver is real. There will be a huge discrepancies in the prices between sellers and buyers. And those who are trading with you, are also trying to do the same thing you are, getting richer during the crisis.

I believe the gaurd to your wealth shold be an income generating asset not an “hopefully” appreciating asset. Ideally it is mobile, but that is very hard condition. For example, what if you own the only water purifying truck around. You can make a killing driving around and purifying people water so they can drink it.  Food, health, shelter, safety are probably the most important things in the SHTF scenario. So if you provide any kind of medical services, you have that income generating asset, you. If you own a hotel or a extra house to rent, that is income generating.

However, if the law and order disappeared, then you are going to find it hard to collect “rent”, evict someone, and let alone stop zombies from burning your house down for example. Insurance is not going to be able to pay that much damage for everyone so you are going to be out. Remember, insurance is just like the FEDs backed by our faith in the insurance company.  If it goes bankrupt, then good luck collecting.

One thought on “The Case For Gold

  1. Lisa Post author

    So in the last social unrest that started with George Floyd and kept going due to the deteriorating economic conditions my last paragraphs above became true. No one was paying rent, and landlord could not do a damn thing about it. In fact, “governments” took the side of the renters against landlords and home “owners” against the banks. Not that it was the moral or ethical thing to do, but rather to avoid an all blown out street revolutions. The latter happened anyway and we have seen some of the vandalisation of properties and house take place. So next thing is going to be, (1) premium rising (2) taxes rising.

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