Wednesday, May 16, 2012

GOLD AT $10,000?

There is a war against gold. Politicians hate a rising price of gold. So do central
bankers. A rising price of gold testifies against the politicians, who spend more money
than they collect in taxes or borrow at interest, and it also testifies against central bankers,
whose promises to stop rising prices is a lie that has not come true since about 1939.
So, these people do whatever they can to ridicule gold and gold buyers. They do
whatever they can to drive down the price of gold – everything except the one thing that
would drive it down: cease inflating.

Gold has risen to match price inflation. But has not risen slowly and steadily.
Because gold has moves in spurts for a few years, then stagnates or falls (1980-2001),
people hear about gold in the tail end of the bull phase. They buy. Then they look for
reasons why they bought. This is true of most markets. Gold and silver are no exceptions.
The people who bought after one of the bull moves tend to become true believers
in gold. There are good reasons to become a true believer in gold, but the most popular
one is a bad reason: “I just bought gold.”

Gold’s purchasing power today is close to what it was in 1933, after Roosevelt
hiked gold’s price from $20 an ounce to $35 -- after the government had confiscated the
public’s gold. Thus, in the broadest sense, gold is an inflation hedge.
You will hear hype about gold at $10,000, just as in 1999 there was hype about
“Dow 36,000.” If you are tempted to believe these headlines, consider the warning by
free market economist and retired finance professor, Michael Rozeff.
Looked at this way, it is evident that gold in the portfolio is equivalent to
insurance against some devastating contingencies. Complete or partial
insurance are possible. The more gold you have, the more insurance you are
buying. Over-insuring is costly because the overall rate of return of the
portfolio goes down if nothing happens. That’s because gold historically
provides no real return. Everyone has to decide for himself what the odds of
these scenarios or ones like them are, how to insure against them as with
gold or some other real assets, how high gold will go when other assets
decline, and how much to insure against these events.

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