Gold…Real Money

Posted on February 2, 2010 by

Investor/hedge fund manager extraordinaire George Soros recently called gold an “asset bubble.” While I certainly feel Soros is a very smart guy, I’m really certain he got this one wrong. I think he’s implying that gold is overpriced, but in my opinion he’s making the same mistake everyone makes when talking about gold. He’s measuring gold in terms of the value of gold in U.S. dollars as if the U.S. dollar was …what an appropriate term…the “gold standard” of value. To me this is backwards thinking. The issue for me isn’t the price of gold in U.S. dollars, but the value of the U.S. dollar in terms of gold.

Let’s look at the long term facts. And the stone cold hard fact is that in the long term the U.S. dollar has consistently and significantly deteriorated in value. What’s the cheapest price you remember for a gallon of gas. I remember in the early 1960s when gas was 29 cents a gallon and would go down a little lower during “gas wars.” As a high schooler, we would give rides to the beach to anyone who could contribute a quarter for gas money even if we didn’t like them because if you had 75 cents you had enough money left over to get from Santa Ana to Newport Beach and back and still have enough money left over to buy two Der Weinerschnitzel hot dogs with chili, cheese, and onions for 15 cents each.

Continue the exercise. What price did your parents pay for a house in the 1950s or 1960s. My parents bought a semi-decent house (2500 sq ft plus a real swimming pool) in Santa Ana, California for $14,000 in 1960. Even though California real estate has come down pretty hard that house is still worth $400,000 or so today. I remember the 3 cent stamp for first class mail. And I remember movies at 25 cents and popcorn at a dime. I’m not trying to sound like an old timer here but the fact is that the dollar buys less now than it did 40 years, 30 years ago, 20 years ago and, in many cases, yesterday.

And what is our government doing? They are printing more money…or sticking it in computer accounts or however they expand the money supply today. Record deficits, health care plans, wars, bail-outs…spend, spend, spend. As my commodity trading friends would say, this is an obvious trade.

It is guaranteed that the dollar will continue to lose value long term…unless U.S. fiscal policy is dramatically changed and you and I know that’s not going to happen. The value of the dollar will decline and real things…land, oil, real businesses, milk, pasta, and our favorite…rare coins…and of course gold, will increase in value when measured in depreciating U.S. dollars.

So what do we do. First, everyone needs to get their head on straight about how to measure value. I own some ounces of gold…U.S. eagles and a few other things. I have to tell you I don’t fret about the price of gold measured in U.S. dollars. If the price of gold goes up, then the coin market is good and the gold I own is “worth” more so I’m happy. If the price of gold goes down, I’m also happy because then I get to buy more ounces of Oro Puro and I know the decline is only big picture temporary.

My advice to you, if you want to buy gold, go for it! But don’t try to pick the right time, because a lot of people who are way smarter than you and me only get market timing right 50% or so of the time. And don’t worry about the price. Buy your ounces of gold, put them away and forget about them. The only number you should think about is the number I focus on. I don’t think about the price of gold…that’s not the number. I think about how many ounces of gold I own…now that’s the number I think about and the number I want to grow, no matter what the price of gold is in terms of U.S. dollars.

So buy gold if you like it…and of course have fun with your coins.

Your gold bug friend David Hall

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Comments (12)

 

  1. RYK says:

    While I do not consider myself a “gold bug”, I believe that it is in the best interest of most individuals to have some gold as part of their nest egg, portfolio, accumulated wealth, or whatever you wish to call it. Everyone will have a number (percentage of wealth or size of accumulation) that feels right for them, but the number “zero” is probably not a wise choice for most.

    There are many ways to buy gold, some mundane, some flashy, and some historic. As a coin collector, I like my gold to be old and interesting. As a nest egg builder, bullion coins work just fine. There is no one size fits all recommendation that suits everyone.

    I also agree with DH in that I spend little time worrying or discussing the price of gold. If it goes up, I win. If it goes down, I win. So why worry?

  2. Goldbully says:

    “and of course have fun with your coins.” That’s a great gravestone marker momento!!! I remember $.29 gas and gas wars!!! “Buy your gold where I buy mine!”
    G. Gordon Liddy

  3. Paul Brannon says:

    Good to hear your thoughts David.

    Lately watching the precious metal live market quotes go up and down is like riding a roller coaster. Sometimes just as scary.

  4. The Other Side of the Coin says:

    George Soros is right. Gold is an “asset bubble.” At any moment our government and other central banks can drive down the price to wherever they want it like they did from 1980 to 2000. Our government could also confiscate gold like it did in 1933, only this time without a numismatic exemption. The very few who will put their career, wealth and life on the line to oppose our government will get crushed. The only thing of value that will enable you to survive is a doctorate degree from a liberal university, a government job, and the right political connections. Enjoy numismatics and collecting gold, if that’s your thing, for the satisfaction you derive; not for the security and store of value the gold bugs proclaim.

  5. Bus says:

    I’m a new entry into the gold coin collection arena. I’m a novice at best. I have some 10 Dollar Indian Head MS 61 coins. They have lost almost 18% in the last 3 months. I’d like to know the experts opinions. Did I buy the wrong coin or MS or should I just relax and hope for the best?

  6. Steve says:

    David,

    I always get the inflation calculator out when I see comparisons.

    http://data.bls.gov/cgi-bin/cpicalc.pl

    Well, that gallon of gas for .29 cents is about 1.99 if your year of reference is 1965. Not too much higher than today.

    http://www.eia.doe.gov/oil_gas/petroleum/data_publications/wrgp/mogas_home_page.html

    Now I have another question, if you used 3 silver dimes in 1963 to buy the gas and compared the buying power of that silver today, I bet it would be close to a gallon of gas, maybe a little bit more.

    The problem with comparisons is it just depends on the time reference. My father (born in 37) was richly rewarded for NOT investing in the stock market, gold, or even saving money. He just collects inflation adjusted pensions (one public service job, one private company and Social Security). This will not be an option for me in my retirement, I was born at the wrong time (’74)

    For my generation, a simple savings account would have served us better for the first 15 years of our saving career, will it serve us better in the 25? Dunno. No one really does. It’s easy to say the stock market…. gold has…. commodities will….over time returns will average…..

    Why does Soros knock gold? He knows, like every other central banker, that the real value has not increased over time. It’s a store of wealth. He’s looking for speculator’s returns, like the English Pound devaluation, not something that over the last 500 years has not gained / lost value.

    He seeks volatility, which gold doesn’t know over it’s history.

  7. Jon says:

    I’m a long-term proponent, and I favor diversification. Anyone owning stocks–in my case, mutual funds in a portfolio that will in 20 years be my retirement–faced a big shock in 2008. But, we got a good portion of it back over the past 18 months. Gold is great for protecting wealth, but it won’t generate wealth, unless one faces apocalyptic castastrophe, in which case, a gun and a physical fitness regimen are the best long-term investments.

    Rather, I see collecting gold coins as an activity that is somewhere in between hobby and investment. I’m building a back-up portfolio that can be used as last resort, but hopefully will instead be somebody’s inheritance maybe 40 or 50 years from now. It’s a lot prettier and more interesting to look at than some graphs and numbers, and it’s a lot better at retaining value than other hobbies like building computers, which depreciate ridiculously fast.

    Bus, if you’re reading this, hang onto your MS61 Indians. The spread between bullion worth and numismatic value right now is remarkably low, and I don’t expect it to stay that way. You’ve got a good start of a portfolio of gold with the protection of numismatic interest, as opposed to modern eagles, maples, and bricks. An 18% drop in value over two or three months in the gold market is hardly meaningful. Indeed, between the time of your post and mine, I think bullion has recovered most of its value. If your coins haven’t, it’s simply because of a lag between gold’s rise and uncirculated rare gold’s rise. Absolutely don’t sell now, because the lag period between the two is the BEST time to buy. Case in point, I bought an MS65 Saint Gaudens double eagle in July 2008 for $1500. Gold was floating around $900 an ounce then. A year ago when gold went up and then back down to $900, the Saint spiked $3000 and only dropped to about $2300 or so, where it has held steady since. I suspect it will rise again soon, so I’m hanging on.

  8. (4-30-10) At the moment I’m trying to decide which is more likely,default or devalue by the US — or standing pat. Devalue means no vacations outside the US, which is tolerable. Default means we are all in the soup! I would love to hear from someone 65 or 70, of German extraction, who has deep roots in Germany — post WWI. Would a pocket full of gold helped?! Sorry to cast gloom on such a beautiful day, but the unthinkable has become …

    Joseph

  9. Ron Guth says:

    Shifts in the price of gold reflect the stability or volatility of the currencies compared to it. In a stable economy, the price of gold remains relatively flat; in an unstable economy, the price of gold becomes volatile. While the price of gold can be manipulated to some extent by forces such as central bankers, supply/demand disruptions, and the like, big swings in the price of gold reveal uncertainty about a government’s fiscal policies. David is right, an ounce of gold fifty years ago is an ounce of gold today, but the amount of dollars required to purchase that ounce has changed thanks to an insidious thing called inflation.

    I just read an interesting article about the hyperinflation in Weimar Germany, including a diary from a wealthy woman who asked her financial advisors how to protect herself against the eroding value of the German Mark. No matter what financial instrument she tried, the value of her portfolio continued to decline until it eventually became worthless. At the end of it all, her (paraphrased) comment was, “The only things that would have saved me were gold or the forbidden foreign currencies.

  10. Mas Buddy says:

    You are absolutely right ! don’t worry about the price. Buy your ounces of gold, put them away and forget about them…. hehehe, I just do the same to you, but just dont forget about where and what amount you have. Peoples who still comparing the gold with the price of it in currencies, should consider to read about the intrinsic value of the gold…and like you say it, have fun with your gold coins.

    great greetings

  11. Mike says:

    In response to Mr. “Other Side Of The Coin”, when what you stated happens, no type of degree from any university will save you. Gold has been a store of wealth and “real money” for over 3,000 years. All of a sudden it’s going to be worthless just because the U.S. governement says so? You have to have more to your arguement than that. Yes, there has been manipulations in the metals markets but sooner or later it will all get exposed. There’s a better chance of our civilization collapsing before gold does. And as far government confiscation of gold….thanks for the laugh.

  12. David, inflation is certainly one factor effecting the price of Gold. As the value of the dollar decreases in time, so does it’s ability to purchase any physical asset, whether it be Gasoline or Gold.

    Over the past decade, however, Gold has been going up in value not simply because the Dollar is going down; Gold is actually increasing in value in relation to virtually all other assets and currencies, not just US Dollars.

    This begs the question: Why?

    The answer, of course, is Deflation!

    But wait, You say… we can’t simultaneously have an economy with both Deflation AND Inflation, can You?!

    The answer, tragically, is Yes. This is called ‘stagflation’, and it is the inevitable result of a financial system which is built upon usury and fraud.

    Until we learn to build a financial system which functions for the benefit of all humanity, rather than just Wall Street, I expect this trend to simply accelerate- until the entire system collapses like the house of cards that it is.

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