The recent run up in gold prices may have less to do with gold’s value as an investment than how bad the alternatives look in comparison.
Last week, investors who hung on to equities through the roller coaster gyrations ended up taking a beating. Many small investors are pulling their money out the markets once and for all, a trend happening both here and abroad.
The simultaneous nature of the equity market melt down in the U.S. and Europe is part of what is propelling gold prices. In Europe, gold has moved beyond a safe-haven investment and is becoming a currency. In the U.S. a lot of people are starting to question their faith in the dollar. Gold is becoming the embodiment of all things anti-currency. All that’s lacking is a convenient and reliable way to exchange gold and silver.
There is so much currency flowing out of equity markets and sloshing around global financial systems that central banks are playing an endless game of “hot potato” with their own currencies, trying not to look too good in relation to their peers.
Take the Swiss franc as an example. As the world simultaneously lost faith in the euro and dollar, a lot of money flowed into Switzerland’s currency. What did Swiss banks do in response? They debased the value of their own currency by printing more francs and intentionally lowering interest rates. That story is repeated, in one form or another, for every currency that starts looking attractive as a safe harbor.
That’s my big beef with people suggesting the U.S. should go back to the gold standard. It would be a management nightmare, worse than the Federal Reserve. The minute we flipped that switch, world money would flow into the new currency, driving up the exchange rate. U.S. exports would dry up overnight as the cost of goods and services from the U.S. would become comparatively more expensive. Having a strong currency when the world is melting down financially is not necessarily an advantage.
Nevertheless, gold is taking on a new global role as a medium of exchange. Just because it may not be a great idea for the U.S. to run a commodity-backed currency, doesn’t mean it’s a bad idea. Someone will create a simple and reliable exchange for gold and silver, because the world desperately needs it.
How you position your own investments from here on will depend on whether you believe the current crisis is a condition that will pass or represents a new reality. Gold prices will certainly correct at some point, but long term the price is determined largely by monetary policy. Right now global monetary policy is operating decidedly in favor of the bulls.
Another feature of the current bull run in gold it that it has thus far been immune to normally bearish pressures. When the CME raised margin requirements prices should have corrected, yet gold didn’t budge.
Even at that, anyone buying gold at these prices should be buying as part of a long-term strategy, purchasing crisis currency, or know what you’re doing.
If you are turning to gold and silver as a hedge against inflation and currency debasement, it would be wise to take some time to learn the business before committing a lot of money. While buying gold is relatively straightforward, selling can be a little more difficult. There is little regulation of the gold trade and dealers can demand whatever margin they want and shady operators are rampant.
Until there is a more convenient and reliable method of moving precious metals around and some kind of central authority to manage it, you’ll have to learn about the business. If you’re going to trade gold and silver, it’s worth the effort.
If you want to do more in-depth reading about gold and silver as an investment, I’d recommend Michael Maloney’s Guide To Investing In Gold and Silver and The Collapse of the Dollar and How to Profit from It by John Rubino.
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