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Gold holds fast as a solid investment

Now, about gold. The metal has actually been going up since late 2000 after being in a bear market for nearly 20 years.

The last blow-out in 1980 was the result of high inflation and the expectation that inflation would continue or perhaps accelerate.

Enter Paul Volcker. Interest rates were allowed to soar in order to squeeze inflation out of the economy. The crash in gold prices probably had more to do with interest rates being high than any kind of expectation about lower inflation.

Nixon took us completely off the gold standard on Aug. 15, 1971, and the U.S. dollar has been a fiat currency ever since. Fiat as in backed by nothing except the full faith and credit of the United States. But then so were all the other currencies of the world since 1971, so the arrangement kind of worked for much longer than historically might have been expected. Historically, all fiat currencies eventually go to zero. Without exception.

So far the British pound and U.S. dollar have not gone to zero, but not because of any monetary policy virtue of either country. Eventually they too will go to zero. The French have had their currency essentially fail four times just in the 20th century.  Yet there has been this paradigm that says it isn’t possible for that to happen with sterling or the dollar. That paradigm will eventually crater. It may take a few more years for the currencies to collapse, in fact might not even happen in our lifetime, but eventually they are both going to zero. Long term investors in gold consider this to be the most important and fundamental reason for owning the metal, even though its price tends to be highly volatile short-term.

But back to Volcker. High interest rates make gold much less attractive because gold pays no interest or dividends. When I say “interest rate” I am referring to the actual interest rate not the nominal interest rate. Actual rate equals nominal rate minus inflation rate. Hence, an interest rate of 15 percent is still bullish for gold if the inflation rate exceeds 15 percent at the same time. Whenever actual interest rates are negative, that is the nominal rate is less than the inflation rate, gold tends to do well, as has been the case for the past 10 years. The same can be said about a lot of asset classes, including stocks and real estate.

There is however, one huge difference between gold and most other asset classes: Gold has zero counter-party risk. Gold is one of the few assets that does not show up on someone else’s balance sheet as a liability. If you own bonds, it is an asset to you, but to the corporation that issued it, the bond is a liability. Ditto stocks as well as most other investments where there is a counter-party of some sorts. This also applies to real estate that has any kind of mortgage involved. It becomes part of the dual entry bookkeeping system, wherein the mortgage is a liability to one party and an asset to the other.

And that is what has made gold so attractive over the last few years, even more so than the negative real interest rates that still prevail. There is so much unknown counter-party risk because of the financial weapons of mass destruction created by the investment banks. No one knows for sure what anything is worth these days. You don’t hear much about it, but the ratings agencies all conspired with the big investment banks to allow all sorts of investment vehicles to be created with much higher ratings than they should have been given.

They all play stupid about it on Wall Street, but make no mistake about it, these guys all knew what they were doing all along. The Clinton Administration started it all, and it only got worse under Bush Jr. All indications so far are that Obama is going to follow the same status quo and let the investment banks dictate public policy to the government. That’s why no one has gone to jail. Instead, massive bailouts have been handed over to these people in an effort to keep the Ponzi scheme going. Not a single indictment has been handed down, and the whole thing is being treated as an act of God instead of as the act of fraud that it really was (and still is). That’s the sort of thing that also tends to make gold prices rally, if for no other reason than the possibility of civil disturbance at some point spawned by the corruption on Wall Street and in Washington.

But I digress. Gold prices pretty much tanked all through the Clinton administration because of four things:

1.) The collapse of the Soviet Union left us as the only super-power, hence the reserve status of the U.S. dollar was greatly enhanced.

2.) There was (according to the government) a productivity surge all through the 1990s, which unfortunately for you and me only benefited the very richest half percentile of the population.

3.) Inflation was very low by historical standards, however the way the Labor Department calculated the inflation rate was as crooked as ever. Real inflation rates throughout most of the economy were much, much higher than the government claimed.

4.) Tax receipts surged for the federal government creating the illusion of a budget surplus that never existed to begin with because growing liabilities for Social Security and Medicare were never factored in. Conveniently for the Clinton administration, the surplus calculations left that part out. In any case, all of these factors helped suppress the price of gold.

Enter George Bush Jr. Any charade of a balanced budget went out the window, and in eight years more U.S. debt was created than all the previous administrations combined going all the way back to George Washington. This same phenomenon applies to Obama to an even greater degree. And this too partly explains the somewhat parabolic reaction in gold prices, especially since early 2007.

How much higher can gold go? That’s a very good question. A far better question would be how much lower can the U.S. dollar go, and that answer is easy: All the way to zero eventually. Ditto all the other currencies out there, including the yen, euro and pound. In fact, there are only two currencies in the world today that have any fundamental reason to remain strong, Australia and Canada, and both because of the natural resource nature of their economies.

So, if you have decided gold is a good way to preserve capital, it may be the right investment for you. If, on the other hand, the recent price trends prove attractive from a speculative vantage point, you might be in for a rough ride. Generally, investors who put money into gold out of fear, tend to do better than those who put money into it out of greed. I say that only because the tendency of speculators is to sell when corrections knock the price down.

That’s not to say there shouldn’t be an exit strategy of some sort in place when you invest. But I am of the opinion that the timing of selling gold (or any other asset for that matter) should be dictated by individual circumstances and not the price action of the underlying investment. Most investors will do far better to sell an investment because they need the money to send a kid to college (for instance) than an investor will do trying to time the price of the gold market (or any other market) to maximize a gain. 

In any case, here are two very good resources for precious metal prices: www.kitco.com/market and www.bullionvault.com/gold-price-chart.do

My own suspicion is that silver may well out-perform gold in 2010. As for platinum, I am of the opinion that the price has factored in an economic rebound which may well fail materialize. I wouldn’t touch it at these levels. Keep in mind platinum has never historically had the same monetary properties as gold and silver, and is essentially an industrial metal, albeit a very valuable one that some make jewelry out of.

As for the best coins or bars to buy, you should consider a weekly subscription to Numismatic News and read-up for a few weeks. The advertisements alone will give you a good idea of what kind of premium you will need to pay above spot metal prices. (www.numismaticnews.net/magazine/)

Most investors in gold begin with generic Krugerrands, Canadian Maple Leafs, or American Eagles before venturing into the more esoteric gold issues. Generally speaking, for any coin that is allegedly of interest to collectors (regardless of what metal it is made of or how much metal is in the coin), three things come into play when determining the value the coin: supply, demand and condition of the specimen.

It is the second item – demand — that is most important. A coin could be unique (only example known) and still be worthless if there is no demand for it. One other consideration is authenticity. If the coin is fake it may be worth less than even the gold or silver in it. For this reason alone, you want to be dealing with people you can trust and who know what they are doing when buying rare coins.

Like most gold bugs, I started out with bullion coins then became interested in rare coins. Personally, I have always concentrated on foreign coins because I enjoy the history behind them. Also, the artistry tends to be much better on many of them than U.S. issues, especially U.S. issues struck since 1948, which have frankly been pretty lame.

Here’s an example that meets all three of the criteria above. Very Rare. Very much in demand. Extremely well preserved. Hence worth at least 5 times the value of the gold in it. And graded for condition and authenticity.

Well, there you have it, a primer on investing in gold and rare coins.

Bruce Walker
is a hobbyist from Kansas City.
Viewpoint is a forum for the expression of opinion on a variety of numismatic subjects. The opinions expressed here are not necessarily those of Numismatic News. To have your opinion considered for Viewpoint, write to David C. Harper, Editor, Numismatic News, 700 E. State St., Iola, WI 54990. Send e-mail to david.harper@fwmedia.com.

More Resources:

• Subscribe to our Coin Price Guide, buy Coin BooksCoin Folders and join the NumisMaster VIP Program

2010 U.S. Coin Digest, The Complete Guide to Current Market Values, 8th ed.

State Quarters Deluxe Folder By Warmans

Standard Guide to Small-Size U.S. Paper Money, 1928 to Date

Strike It Rich with Pocket Change, 2nd Edition



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