Thursday, July 14, 2011

All that glitters...

Quick post to start off the day, the first of possibly several for Thursday.

The Sovereign Debt situation has sent Gold surging to new record nominal highs at $1,594.45 per ounce and Silver has leapt another 3% to over $39 per ounce after yesterday’s 6% rise.

Gold is now targeting $1600 per ounce and Silver has surged 9% in 24 hours as the US dollar plummets in value.

Yesterday's debate between US Federal Reserve Chairman, Ben Bernanke, and US Presidential candidate Ron Paul at the U.S. House Banking Committee session is the big news today.

Ron. Paul asked about the collapse in the value of the dollar by almost 50% in the past three years to less than a 1,580th of an ounce of gold. From their exchange:

Ron Paul: “When you wake up in the morning, do you care about the price of gold?”
Ben Bernanke: “Well, I pay attention to the price of gold. But I think it reflects a lot of things. It reflects global uncertainties. I think the reason people hold gold is as protection against of what we call tail risks, really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis then they have gold as a protection.”
Ron Paul: "Do you think gold is money?"
Ben Bernanke:  "No. It's a precious metal."
Ron Paul: "Even if it's been money for 6,000 years? Somebody reversed that and eliminated that economic law?"
Ben Bernanke:  "Well, you know, it's an asset. Would you say treasury bills are money? I don't think they're money either, but they're a financial asset."
Ron Paul: "Why do central banks hold it if it's not money?"
Ben Bernanke:  "Well, it's a form of reserves."
Ron Paul: "Why don't they hold diamonds?"
Ben Bernanke:  "Well, it's tradition. Long-term tradition."
Ron Paul: "Some people still think it's money."

What's interesting here is that the Federal Reserve Chairman just admitted that gold is “protection” against “tail risks” and “really, really bad outcomes”. 

Gold is not a fringe asset and is becoming a core part of a properly diversified portfolio which is an important safe haven asset and indeed currency.

While Bernanke made a feeble denial of this, note that he placed Gold on the same level of US Treasury Bills as an "asset" instead of some form of 'barbarous relic'.

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  1. I think the price for gold will go up, due to the devaluation of US$. But I really don't see this world will reverse to gold-backed money. Politically, this mean which ever country has the biggest gold mine (a very un-educated guess: south africa) is the next super power, immediately. And as Buffett pointed out there's about 67ft cube of gold in this world. It's hard to image every single thing we do on this earth (Space program, every nuclear weapon, a slice of bread) are chasing this amount of currency. If that's the case, this world must be unimaginably screwed up and there's really not much left for you and me and our children to live for. If I'm someone who has the nuke and no gold under my feet I'd just send my missile head to the source of gold and eliminate it from the earth. It's probably better/easier to ban the mining/exchange of gold (or silver) than to use it as a currency.

  2. Actually the country with the biggest reserve of Gold would be the United States (by a massive amount) if they really have the over 8,000 tons last audited in the 1950s (Germany is second with 3,400 tons).

    There's more than enough gold to back all of those little pieces of paper with dead presidents/Queen on them, all you have to do is value it properly.

    At $56,000/ounce, US currency could be backed.

    There would then be gold for you based on the amount of dollars you hold.

  3. I honestly think Bernanke is reading from a memorized script. A tradition? What a maroon!