uncharted waters to be sure. Right now, this question carries much more importance than whether or not now is a good time to buy gold…it signifies the faith, or lack of faith, in the World’s economies. If you have no idea about what I am talking about….you really need to keep reading.
For regular readers who have a fairly deep understanding of the economy, financial markets and how precious metals interact, bear with me for a minute. If you are new to much of this, you need to know a few facts:
Gold was money for roughly 5000 years.
When current world governments substituted paper for money, its value was only accepted as a “note” that could be exchanged for gold anytime the holder of the note wanted.
The government set the relationship or price between these “notes” and gold. For many years, that rate was between $20 and $40 an ounce. One ounce of gold could be “swapped” for this government set “official” price in dollars.
The governments needed to keep gold in reserve in these ratios to the dollars they could print and spend. If the national budget was say 20 billion dollars, and the official price of gold was $20 an ounce, the government was supposed to have stored 1 billion ounces of gold in reserve. i.e… The Gold Standard.
The first official act to loosen the rules and allow the officials to spend more without collecting any more real money to fund the spending would be to change the ratios by changing the official price of gold. If they had 1 billion ounces of gold in reserve (many believe long before this they stopped following these rules and stored less than they were directed to by law), and they changed to an official price from $20 to $30, they just added $10 worth of value to their supposed holdings of 1 billion ounces of gold…presto-change-o, $10 billion dollars of extra cash in their coffers.
Eventually the government officials became less able to say no to anything and instead, changed the rules, eventually ending with President Roosevelt removing the US dollar from most of the gold standard during the Great Depression in 1933 while making it illegal for a US citizen to own most kinds of gold. In 1971, President Nixon finished off what little relationship left between how much gold the Federal Reserve needed to have in reserve to back the amount of dollars they could print. Now they were free to decide – if they needed more money, officially raise the debt ceiling, then just print some up. Gold was officially not money anymore.
So, now knowing that Gold is not money and not directly tied to it in any formal way, when considering gold investments, will gold continue to rise?
But wait a minute. If there is no relationship between gold and the US dollar, why has Gold been rising in the first place and who cares? It is a precious metal and by definition this means there is not much of it and it seems to be something people want to own. Unlike other precious metals like silver, palladium, rhodium, etc…gold is not used in any manufacturing. There is no need to acquire more of it for increased production in other products – this is not what is driving up gold’s price. There is most definitely an increase demand that is a component of gold’s steady rise in price…but why and from whom? Other than jewelry, and an occasional tooth filling, could that be it…more cavities and bracelets? No.
In fact, the more “traditional” investment crowd who consider stocks and bonds as “real” investments would argue that there is no such thing as gold as an investment any more than they would consider lumber an investment. This is the common front presented from Ben Bernanke, the Chairman of the Federal Reserve, on down to your local banker and stock broker. Yet…gold’s price just keeps on risin