They sit in little hovels that are dimly lit. Their worldly possessions are hidden beneath the floor boards. They have hoarded copies of the Australian Financial Review for the last thirty years – piled in one corner of the room.
They emerge only after the sun has gone down, sporting a graying shabby beard. They use a length of string to hold up their trousers, and shout obscenities to old ladies and children.
That, readers is the life of a gold investor.
Or at least it isn’t far off the image that ‘gold bugs’ have been tarnished with for at least the last twenty years. There is little doubt that among most mainstream investors, the told ‘gold bug’ is used derogatively, and the idea of investing in gold is met with derision.
But on Friday in New York trading, spot gold reacquainted itself with the USD$1,000 per ounce level and gold as an investment is almost – but not quite – getting the attention of mainstream investors.
It will probably take a little while longer for mainstream investment advisers to take note. Expect them to jump on board if/when the price reaches about USD$2,000 an ounce.
The main reason that gold investing is met with such derision is because most people just don’t want to think about what it means. You only have to see the expression on the face of commentators when they talk about it to see that they don’t understand why anyone would want to invest in gold.
They usually lead with the statement: “You can’t eat it, you can’t wear it, and it doesn’t pay you an income, so what’s the point of it?”
Obviously they haven’t considered that you can’t eat 100% of the shares traded on the ASX. And since they got rid of paper certificates you can’t wear them either. And, probably only about half the companies listed provide an income stream.
So in that sense gold is little different to most other investments.
But it does have a few key important qualities. The main one being its scarcity.
You’ll often read in the press that gold is seen as a hedge against inflation, but it never really explains what that means. How can a metal act as a counterweight to rising prices and the increase in the money supply?
How is that possible? Well, it is possible.
The best way to consider it is that gold is a scare commodity. Further, it is not an easy process to get hold of new supplies of the raw material. You only have to look at any gold mining annual report to see that they need to digs up tonnes and tonnes of rock in order to extract just a few ounces of the stuff.
Compare that to the ‘creation’ of new money which can be done at the click of a mouse or the push of a button.
Therefore, the reason gold rises in value can be simply explained. If you have an item which is scarce (gold), and price it in terms of something which is not scare (dollars) then the creation of more dollars should mean that the dollars lose value when compared to gold.
That’s inflation in a nutshell.
Arguments also run that the central banks have tonnes of it in storage and they can have a major downward influence on the price. That’s try in one degree, but just take a look at the gold reserves.
The US has over 8,000 tonnes of gold in its reserves. In dollar terms that values it at around USD$260 billion. It sounds like a lot, but it’s less than a third of the amount that Obama has promised to spend on their recent stimulus package, and is only 2% of the total value of US debt.
And is only about 5% of the total US dollar currency on issue.
All up, despite the years of humiliation that ‘gold bugs’ have had to endure during the last few years, it seems as though at last everyone else is finally starting to ‘get’ what investing in gold really means.
Other Stuff on the Markets
The Dow Jones took another hit on Friday, and the Aussie market is stumbling this morning.
Gold surpassed USD$1,000 per ounce, and is firmly above AUD$1,500 per ounce.
European prime ministers have decided that further regulation is the key to ‘curing’ financial markets. Oh dear!
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