Friday, April 23, 2010

Market fundamentals favor gold

According to standard wisdom, a strong dollar makes gold less attractive, and vice versa. But as Peter Degraaf points out, the rising dollar of recent months has failed to dampen investors' enthusiasm for gold. As he explains:
A powerful source of energy for gold and silver is the ‘real interest rate’. At the moment US T-bills are yielding 1.5%. The rate of price inflation according to Mr. John Williams at is about 5.5%. This means inflation is eating away 4% of a dollar that is invested in a T-bill for a year. That is ‘negative real interest’, and gold historically thrives under those conditions.
He goes on:
Other bullish factors for gold and silver include the accelerated increase in national debt of which Greece is just the tip of the iceberg. Next in line will be Spain, Portugal, Ireland and Iceland. There will no doubt be others. In the USA a number of states are technically bankrupt and will be looking for the Federal Government to come to the rescue (read more money printing). These include California, New York, Illinois among others.

Finally there is the realization among investors that their paper gold certificates (including futures and options) have about 1 ounce of gold backing 100 ounce commitments. This game of ‘musical chairs’ will have a bad ending, except for those of us who demand ‘stuff’ instead of ‘fluff’.
Inflation has been the policy of most governments throughout history. It has become the defining characteristic of the U.S. economy. But there is nothing wise or necessary about inflation. Like taxation, it is simply another form of theft that's been given respectability by hacks for the state. Many people still believe inflation will never be a significant problem because we have the Federal Reserve. It is precisely because of the Federal Reserve that inflation threatens the economic foundation of the world.


David Wozney said...

Re: “Inflation has been the policy of most governments throughout history. It has become the defining characteristic of the U.S. economy.

If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2009 U.S. Mint nickels, composed of cupronickel alloy, could become somewhat rare in mass circulation.

The April 23rd metal value of these nickels is “$0.0625836” or 125.16% of face value, according to the “United States Circulating Coinage Intrinsic Value Table” available at

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