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| May 17, 2007 6:21 pm |
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Quote- The Daily Reckoning - |
Adam Antoszewski
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Investing in Gold
Dear Reader,
The big news so far this year is the steep rise in the price of gold. The old yellow metal is telling us something. But most people are deaf to gold. They can't hear it laughing.
Most people believe that gold is a "speculation." They've heard that it pays no dividends. They've never heard of any "progress" or any quarterly earnings projections from gold. Gold never announces any fancy new technology. It never tells investors how fast it is growing or how many new customers it has.
Nor do people have any reason to think that the world's financial system is in danger. "Hasn't it always been this way?" they ask.
The answer is "no." The present international financial system is an experiment. It has only existed since 1971, when the United States cut the umbilical cord between the dollar and gold. Before that, gold almost always stood behind the dollar, and other paper currencies. Why? You might just as well ask us "Why do fools fall in love?" or "Why is there air?"
If central bankers could create "money" simply by printing paper currency on a printing press, the world would soon be full of paper currency. And everywhere and always, the price of a thing varies with its availability.
The more there is, the cheaper it is. Generally, as the volume of paper money increases, its unit price falls. Always has; always will.
This is not the first time central bankers have tried a system of purely faith-based currency. Every previous experiment ended in the predictable way: the bankers created more and more "money." And as the quantity increased, the quality decreased. Eventually, the "money" was of such poor quality that people would no longer accept it. In recent history, the Argentine currency lost 90% of its value in a single year. In less-recent history, the German currency lost 999% of its value in a matter of weeks.
Between the time a man ordered a beer and the time he finished it, the price might have risen two or three times.
"Money" comes in many forms and guises. In our wallet, we have paper notes that remind us of our travels. There are British pounds, of course. But we also have a few euros, a few hundred Argentine pesos, one half-torn 10-cordoba note from Nicaragua, and exactly two U.S. dollars.
We also have a collection of credit cards, each one of which has a certain purchasing power. And if we check our accounts, we find that we have "dollars" or "euros" in various forms and various amounts. At least, we believe we have dollars and euros. We have had them for many years, but we've never actually seen them. As far as we know, they exist in no other form than the electronic information that arrives to our computer terminal.
Still, we are confident that we could convert them into goods or services at any time we needed to. We could even sell our farm in America.
According to friends, its value has more than doubled in the last six years. That is, we could get twice as many dollars for it today as we would have gotten in 1999. Where did this extra purchasing power come from, we wonder?
The trouble is, depending upon time and circumstance, the amount of goods and services we would get for our dollars is subject to change. That's why gold is chuckling to itself. It is watching the supply of "money" and potential purchasing power increase at shocking rate. As it goes up, the quality of the money we hold goes down.
For the first time since the Great Depression, Americans are spending more than they earn. The savings rate is negative. This gap has to be filled with "money." The nation's trade deficit was $664 billion in 2004. In 2005, it rose to $806 billion. And the IMF estimates that it will hit $890 billion this year. These gaps, too, must be filled. Each deficit ends up in foreigners' hands as purchasing power. In three years time, more dollars are added to the world's supply than the current price of all the gold ever mined since the beginning of time.
Meanwhile, the U.S. federal budget deficits shoot up, too. During the two terms of George W. Bush alone, the feds have borrowed more money from foreign governments and banks than was borrowed by all other American administrations put together, from 1776 to 2000. So too will more debt be added to the national burden in the eight Bush years than in the previous 224.
According to the Bush-friendly Heritage Foundation, federal deficits are expected to rise to $1 trillion per year, by the year 2017, with a $16 trillion national debt, twice today's level. After that, deficits should grow to $2 trillion per year.
Money, money, money…the Fed is also recreating new money at the fastest pace in history. At the present rate, M3 is ballooning even more rapidly than the trade deficit.
Gold guffaws…snorts…and chortles. It knows something, but it isn't talking. Yesterday, it rose to another new high - over $550. It's even higher than Google.
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