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ECONOMIC ANALYSIS:

Thinking About Gold

by Fred Cederholm

The so-called “intrinsic value” of gold and silver becomes a factor when there are fears of rising inflation, political instability, and monetary stability. Every twenty or so years, these fears spring to life.
I've been thinking about gold. Actually I’ve been thinking about investments, image, monetization, media coverage, and Armageddon timing. The goldbugs, those investment professionals who push investing in this yellow precious metal, have been coming out of hibernation. We are seeing more media coverage in random commentaries about gold. I’ve even received a few emails from readers laden with questions. While I am hardly knowledgeable in this area, I have been fascinated by gold and silver as they relate to history, economics, monetary policy, and gaudy celebrity “bling” jewelry.

You see, precious metals are really kind of flukes in the broad spectrum of investments and economic history. They, as objects, are pretty much just...there. I mean, “in and of themselves”: you can’t eat them, they don’t warm you, they don’t shelter you, and they don’t (comfortably) clothe you. Their value over time was substantially derived from image and perception. “Good as gold” surfaces as a buzz phrase for the most part only in times of change and danger. The so-called “intrinsic value” of these precious metals becomes a factor when there are fears of rising inflation, political instability, and monetary stability. Every twenty or so years, they spring to life. There is a flurry of activity. Prices spike. Then the crisis prompting their resurrection fades. Prices subside. They return to another prolonged slumber.

Money can be made via investments in precious metals, but you really have to know what you are doing. Whether one actually purchases (and takes possession of) the metals via ownership of coins or bullion, speculates thru futures contracts, or buys stocks in companies that explore, refine, market, or trade the metals, timing of the transactions is critical. Things tend to languish, and then BOOM, there is a meteoric rise (or decline). Who can forget back in 1980, when the Hunts of Texas took silver prices to celestial records and then were forced to ante-up for a BILLIONdollar margin call in one day? Gold prices escalated in harmony with silver back then in that metals’ boomlet—but usually it's the other way around. The time to buy is before the headlines hit; the time to sell is as they hit! That is how the real money is made—getting in low and getting out high. Holding only tends to cost the investor.

The ongoing status of the U.S. dollar as the world’s reserve currency is highly open to question.
Recent press has chronicled ongoing erosion of the U.S. dollar relative to the other currencies of the world. A dollar now only gets you about seven-tenths of a Euro—or less than one-half of a British Pound. Ongoing status of the U.S. dollar as the world’s reserve currency is highly open to question. There have even been news stories (not reported in the U.S.) that Israel now wants its mega-millions of annual U.S. aid tendered in Euros so as not to be forced to absorb any future currency translation losses!

The U.S. effectively went off the gold standard under Franklin Roosevelt in the 1930’s; the final nail in the coffin for any fixed pegging of “Bullion-to-Bucks” occurred under Richard Nixon in 1971. Since then, there has been no true disadvantage to a fiat U.S. dollar (one having no intrinsic backing), as virtually all of other world currencies have likewise been “fiat monies” (they have no intrinsic backing either). The mere fact that so much paper currency is being printed and circulated worldwide has raised the alarm that the “system” of the central banks is broken and corrupt. There are movements now afoot to return to “the good old days” of currencies backed by gold and/or silver. While such “hard metal backing” did promote a more stable money supply in the sense that Uncle $ugar’s gold or silver certificates did not lose 96% of their purchasing power—as have the Federal Reserve Notes since their creation in 1913—it was virtually impossible to fluctuate the money supply upwards or downwards to meet the needs of swings in the economic cycles which are natural occurrences in history.

The present specters of impending runaway inflation, global political unrest, absence of any hopes for a peace in the Middle East, further declining interest rates, energy availability concerns, and roller coaster valuations in the world’s stock/equity markets will all once again push gold stories to the front page. Will “good as gold” prove to be any answer? Time will tell...

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.
Copyright 2007 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.


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This story was published on October 31, 2007.