Race to the Bottom

Posted: Feb 15, 2012 12:01 AM

Gold was trading down slightly yesterday morning, off $3.41 to $1,714.60 an ounce and silver is down $0.18 to $33.39.  This is one of those odd days that gold tracked opposite the dollar, as one would expect, but crude oil bucked the trend and was up. 

More bad news for the Euro-zone as France, Britain, and Austria received a warning from Moody’s that they could lose their AAA rating.  Italy, Spain and Portugal received warnings of further downgrades.  Really, so what?  A credit downgrade might raise the cost of borrowing slightly for some countries, but since credit ratings are all relative a country’s rating is not as significant as how they stack up against other countries.  So, if the whole world is AA+, then AA doesn’t look that bad.  Bond auctions determine what countries pay for credit, not their credit rating. 

As long as countries can continue borrowing money, independent of their credit rating, the global currency race to the bottom continues unabated and we’re all stuck in a global economy where debt is money.  One thing is for certain, our worldwide currency follies and the endless wheel of borrowing will not end well. 

Warren Buffet points out why buying gold as a growth investment is folly and Ive mentioned that more than once.  That’s why no one suggests putting all your money in gold and silver.  The reason you put 40 gold coins in your safe is not so you can open it up in 10 years and find 45 gold coins.  The real reason is because, when you do open your safe, you’ll still have 40 gold coins.

Regardless of what currency is being used at the time, those 40 gold coins will have some relative value in that new currency.  What you can buy with that gold may have increased, or it may have decreased, but it will be worth something in trade value.  You can’t say that about cash investments.  The only thing you can be certain of with cash investments is that they will diminish in value over time as long as interest rates stay where they are.  Savers are losers in the modern economy. 

I’d also remind those who point to gold charts since the late 90s as proof that I’m wrong that the escalating price of gold does not mean gold has increased in value as much as our currency has lost value. 

Gold and silver absolutely have a place in your investment mix, just make sure you’re investing for the right reasons.   

Chris Poindexter, Senior Writer, National Gold Group, Inc