Gold Doesn’t Lie

Posted by PITHOCRATES - September 19th, 2010

Gold and money have an intimate relationship.  Sort of a love/hate thing.  Because, in general, if you love one, you hate the other.  Actually, those are pretty strong words.  Let’s just say it’s a like/disinterested relationship.

During times of reckless, irresponsible monetary/fiscal policy, many people prefer gold over hard cash.  Why?  Two reasons.  Monetary inflation.  And currency depreciation.  Actually, these are two sides of the same coin.  No pun intended.  Well, maybe a little.

When the government spends more money than they have, they have to get more money.  They can increase taxes.  They can borrow it.  Or print it.   And we the people ultimately get poorer when they do. 

If they increase our taxes, we grow poorer.  And…, well, I guess that’s self-explanatory.

If they borrow it, they have to pay interest on what they borrow.  And, ultimately, we pay that.  When they borrow, they sell government securities.  And when they do, there’re more securities on the market.  They have to compete with corporate and municipal bonds (and other debt offerings).  And these have to compete with the government securities.  And how do you do that?  You attract investors with higher interest rates.  And we grow poorer when we have to pay those higher interest rates on our mortgages, car loans and credit cards.

If they print money it means they can no longer borrow.  Meaning they are so far in debt or so un-creditworthy that no one wants to buy their securities.  This is bad.  Real bad.  Because ‘printing’ is really their only option.  I put ‘printing’ into single quotation marks because most money is electronic these days.  Just numbers in columns.  In the old days, though, more of the money was paper.  And they really printed it.  Like in Weimar Germany following World War I.  Depression and reparations caused their printing presses to spit out cash at staggering rates (inflation).  So much so that the value of each individual note plummeted (currency depreciation).  The Germans actually used it for firewood.  Why?  It took less cash to burn than it took to buy firewood to burn.  And when Germans got any cash that they didn’t burn, they tried to spend it as fast as they cold before it became worthless.

This is how we get poorer with inflation.  It makes our money worth less.  Which makes everything cost more in dollars.

This is why gold is attractive during times of reckless, irresponsible monetary/fiscal policy.  It’s a lot harder to ‘inflate’ the quantity of gold.  You just can’t flick a switch.  You gotta mine it.  Process it.  Transport it.  Then introduce it into the market.  This takes time.  And involves a lot of costs.  It just doesn’t happen overnight.  So gold is a relatively safe asset to park your wealth in.  It holds its value.  And, in dollar terms, it increases its value the more money is depreciated.  As the dollar loses its value, it takes more and more dollars to buy the same amount of gold.

So, a high gold price is basically a rejection of a government’s monetary/fiscal policies.  And governments don’t like this.  Especially the Obama Administration.  Which has raised the bar on being irresponsible.  Gold prices are up.  So Rep. Anthony Weiner, Democrat of New York, is investigating.  And he wants to regulate (see Weiner, Waxman Set Gold Hearing from the Future of Capitalism website).  Because gold-selling companies advertise on conservative, cable programming.  Thus he can kill two birds with one stone.  He can try to hide the consequences of the administration’s irresponsible policies.  And he can hurt the advertising revenue of the news outlets that report on those irresponsible policies, thus muzzling the ‘free press’. 

Rep. Weiner can say what he wants to about the gold-selling companies and the conservative outlets but that doesn’t change one significant fact.  The price of gold is up.  And there is a reason for that.  The current monetary/fiscal policies are heading in a very bad direction.  A politician can lie all he wants about that fact.  But the market, left to its own devices, can’t.  And that’s why they want to regulate it.  So they can make it lie.

(Note:  PITHOCRATES does NOT offer investment advice.  Whether or not gold is a good investment is up to you and your financial adviser.)

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