914 N Mountain View, Santa Ana and the price of gold

Posted on June 22, 2010 by

As I’m writing this gold is at $1221, near its all-time high. Everybody seems to be talking about gold nowadays. And many experts have been predicting gold prices to go to $2,000, $3,000, and even $5,000 per ounce. I am not going to make any predictions. But I want to present a different view of how to think about gold. We’ll start with the fundamentals…actually THE FUNDAMENTAL.

I don’t want to beat a dead horse and I’m sure you’ve probably heard it all before, but the bottom line is that the United States has a fiat currency. The paper money in your wallet and the “electronic money” in your bank accounts is supposedly backed by the “full faith and credit of the U.S. Government.” It’s not backed by gold or any other tangible asset. This “money” is just a bunch of pieces of paper that proclaim “This note is legal tender for all debts public and private.” It’s just paper. And yes you can go to the grocery store and exchange this paper for food. But the fact is that this money buys less food than it did ten years ago, which was less than it bought 20 years ago, which was way less than it bought 30 years ago. To state the obvious, the value of the U.S. dollar has deteriorated dramatically over the long term. If you’re older than a teenager you’ve seen the purchasing power of your dollars decline dramatically.

I think we all need think about this in a way that gets our head on straight about gold, coins, and our real net worth. Don’t think I’m going radical on you, but I believe this is all just a big government Ponzi scheme. I don’t think politicians consciously think about reducing the purchasing power of the dollar and I doubt that they call what they do a Ponzi scheme. I’m pretty sure politicians just think about getting re-elected and the tools to accomplish that are silly deficit spending and catering to special interests and/or anyone who will vote for them. But this whole mechanism is a Ponzi scheme of sorts…robbing Peter to pay Paul, in this case robbing the future to pay the present. And it it is destroying the value of the dollar. And it’s put our country in a pretty precarious position. This robbing of the future to pay the present has been going on for decades and eventually there comes a point when the house of cards gets pretty shaky. When, if, and how the house of cards gets shaken into reality is something I don’t know. But I do know…and this is THE FUNDAMENTAL…that IT IS NOW MATHEMATICALLY IMPOSSIBLE FOR THE U.S. GOVERNMENT TO PAY ITS DEBT.

The question is what to do about the dollar denominated house of fiat money cards. And the first thing I think everyone should do is get their head on straight about dollar denominated thinking. This is part of the problem. You think you live in a million dollar home. But a lot of people live in million dollar homes…the government has made us property millionaires…it just doesn’t mean what it used to. In 1962, my parents bought a house in Santa Ana, California. it was pretty nice for the time…1500 square feet, 4 bedrooms, and a real swimming pool. I’ll even give you the address…914 N Mountain View, Santa Ana, California (it was a track home…not in any mountain and sure didn’t have a mountain view). You can go to Zillow.com and see a picture of that house and the swimming pool I swam in as a teenager. My parents paid $12,000 for the house. At the time there were no million dollar homes…maybe Hearst Castle, but no real homes. An ultra mansion, the biggest in Beverly Hills, was maybe $100,000…maybe. According to Zillow.com the house at 914 N Mountain View is now worth $377,000 (down from $600,000 in 2007). But did the house really go up 31 times, 1.e. 3000%, in the past 48 years? Let’s look at it another way. In 1962, the price of gold was $38 an ounce so it would have taken 317 ounces of gold to buy that house. As I’m writing this gold is at $1220 an ounce so today it would take 309 ounces of gold to buy that house. So, if my parents were alive and they still owned that house they could say they had made over $350,000 on that house. But would they really have? They would if you think of that house as a dollar denominated asset. But in terms of their real tangible net worth nothing really has changed. And you know what…that house i still the same house (basically) that it was in 1962. The house hasn’ changed, and an ounce of gold hasn’t changed. What has changed is the value of the dollar, and the dollar’s value has collapsed long term.

Let’s talk about gold and getting your head on straight about the value of the dollar. When it comes to gold, you need to avoid the trap of thinking about the price of gold in U.S. dollars, or any other currency for that matter. I NEVER THINK ABOUT THE PRICE OF GOLD IN DOLLARS. it’s not the number I pay attention to. The number I think about is THE NUMBER OF OUNCES I OWN! That’s the number I want to get bigger. And I don’t care about the price of gold in dollars. If the dollar price goes down, I buy more. If the dollar price goes up, I smile. Either way I’m happy…and it’s also very liberating. I no people that are always trying to pick the best time to buy some gold. I know a few people who have been waiting for the best time since gold was $450 an ounce. But I never try to pick the best time to buy gold, I just buy it when i feel like I want some more. And I advise you to take the same approach. It’s so much simpler and so much less stressful. You should own gold…no question about that. And you should buy gold when you feel like you want to own it.

What about rare gold coins, or rare coins in general? They are another tangible asset class and a great one at that. And over the long term, they’ve been an even better hedge against the dollar than plain gold bullion. It would take a lot more proof gold coins, rare $20 St. Gaudens, 19th Century silver type coins, Gem quality Walking Liberty half dollars, etc. to buy the house at 914 N Mountain View in 1962 than it would today as unlike gold bullion which has held its value compared to that house,  quality rare coins have actually gone up in real value. And rare coins have a tendency to lag during sharp run-ups in gold prices.  So right this moment, rare coins are relatively inexpensive as a real asset class. But like gold bullion, you need to get your head on straight about prices.The right time to buy is when you feel like it…when you want to own some more rare coins.

Bottom line for me…the dollar will continue to depreciate in value long term, and nothing will be done by politicians to stop the trend…they don’t even talk about it…and they couldn’t do anything about it even if they wanted to. So make sure you own some gold bullion, and if you like rare coins, now’s a great time for them too.

Get some gold and have fun with your coins!

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Comments (4)

 

  1. […] David Hall of PCGS talks about the price of gold, the value of the dollar, and "the fundamental." […]

  2. Joseph Gerloff says:

    Thanks for spelling this out for me ! over the past year i have been vacillating on weather or not to divert my nest egg of mutual funds into more gold and i am constantly seeking advice on weather or not to do this, your credentials sure helps me drawn closer to a decision.
    Thank You

    Joe

  3. Mel says:

    Nice post! I really enjoyed the analysis of your childhood home in gold oz.

  4. […] David Hall gives a very insightful analysis on how you should think about the price of gold […]

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