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Gold – Obsolete Relic or Prudent Insurance?
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(June 3, 2004) Much as we’d like to market the cheery yellow metal just by repeating over and over that it’s fun and satisfying to have your own shiny stacks of gold, we feel that some gravitas is lacking in the Scrooge McDuck approach to hawking gold portfolios. So let’s talk insurance…
Deficit spending by our government is growing, and the US trade deficit with China, Japan, and much else of the world, runs into the hundreds of billions of dollars annually. The accommodating citizens of those countries are accepting our dollars and bonds in payment for real items that we use, wear, drive, and otherwise consume.

Neat trade for us, eh? The world manufactures, grows, and mines real goods, and swaps them for what our Department of the Treasury prints.

Not to scoff at the products of our national presses. The truth is, US paper dollars are accepted currency in most of the world. The green- and blacked-inked products that the US Treasury prints on cotton-linen rag paper actually have international utility as a relatively stable currency, particularly in countries whose own national currency product is viewed with some suspicion by the locals. So it’s not as if we’re not supplying something of value to the world in exchange for their stuff.

But the dollar’s status as the world’s money can change. The continued acceptance of dollars overseas hinges on the expectation that dollars will perform not only as a currency, but also as a store of value (as gold always has), i.e., you can hide them away, and those dollars will still be worth something when you need them in the future.

Yet, what the dollar ultimately lacks (and what gold has) is scarcity. There is about 2/3 of an ounce of gold per person in the world, yet there is no limit to the dollar supply, a commodity that we’re cranking out like there’s no tomorrow. Consequently, over the past three years we have seen a relentless weakening of the dollar versus other currencies, and versus gold.

Gold has been an enduring measure of wealth for many millennia. Yet today, ordinary US citizens don’t think about gold very much at all. Gold hasn’t been everyday money in the US since the early 1930s, and our dollar lost its gold backing in 1971. So in the minds of many Americans, gold as a store of value is an obsolete concept.

And if you likewise believe that gold is a relic, then you most likely feel that owning gold today is unnecessary. You would have a lot of company in that belief, as the US Treasury has for decades declared to the world that gold is a vestige of the past, an unneeded commodity now that the dollar is the world’s reserve currency.

But let’s assume that you don’t think that gold is obsolete, but you don’t own any because you just don’t see the necessity for it.

The question then becomes, exactly when would you decide that owning gold is a good idea?

Obviously, gold would be a useful preserver of capital in a period of rampant inflation, or economic turmoil, or at any time when dollar-denominated assets are being threatened. You certainly would want gold under any of those circumstances, but most importantly, you would want to have purchased gold BEFORE any of those things happened.

Why before? Because you can’t get your house insured after it’s already caught fire. In other words, the gold market measures economic risks every day, and gold is priced in dollars under the real-time influence of news, economic and trade statistics, and a continuous re-evaluation of the state of the world. The more dire things appear to be, the higher the gold price is going to be INSTANTLY.

Think of the gold market as a gigantic, all-risk, insurance underwriter. When things are calm, and the economy and the dollar appear to be in good shape, the market allows you to buy gold insurance cheaply. And that’s the best time to buy insurance – when it seems unnecessary. If you wait until things get dicey, it’ll be too late - the gold market will already reflect a world of worry way ahead of whenever you might have come to that same conclusion.

So if you have assets to protect, and you don’t believe that gold has become obsolete, it behooves you to acquire an insurance policy in the form of gold bullion, preferably at a time when it seems there’s no need for one at all.

Gold is like any other insurance policy in that it’s best left unexercised. You don’t buy auto insurance hoping to be in a car wreck, and you don’t buy life insurance in hopes of death. And in buying gold, you don’t necessarily become a cheerleader for its price to rise. No rational person would wish for the kind of economy in which the price of gold is skyrocketing, because such a scenario often means that other financial assets are going down the tubes. Gold ownership is simply insurance against such an occurrence.

Just for a moment, let’s remove gold’s baggage. Forget about it as an historical symbol of wealth and power, the tangible element of wealth itself, and the very basis of money. And put aside the idea that gold is an investment, or an inflation hedge, or any notion that gold is ‘true money’ in a world of fiat currency. And, like Donald Duck and his nephews so often had to with Uncle Scrooge, we'll ignore that fellow over there having so much fun playing with his stacks of gold coins.

Let’s just consider gold as insurance - a different kind of insurance, with the following advantages:

You only pay for it once – there are no quarterly or annual premiums.

Rates (the gold price) may increase in the future, but your policy cost is fixed forever.

Once you hide your gold away, you never have to think about it again.

In the long run, the coverage that gold provides you will always adjust for inflation – true inflation, not some manipulated CPI or PPI hedonic figment.

Your gold insurance is always transferable, to anyone you choose.

You can borrow against it, or cash it out, at any time. The fact that you bought gold doesn’t mean you’re married to gold.

If you get tired of the form that your gold is in, remember that it is very malleable and has a low melting point. Make it into something else.

And most importantly, gold is permanent. It will survive you, and give your heirs something interesting to fight over.

 

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