Friday, February 13, 2009

Regarding Gold

This post will begin with a preface, that being that we are by no means "gold bugs". Gold should not be viewed through the same lens that one uses to evaluate traditional asset classes i.e. stocks, bonds, commodities, etc. The yellow metal does not pay a dividend, you can not rent it out to others, and it serves no fundamental human need. Warren Buffett once commented on the probable confusion that would be felt by aliens from Mars, if they were able to look down and observe our actions with regards to gold. The observation being that we expend great effort to dig gold out of a hole in the ground, only to sell it to someone else who promptly places it in a separate hole in the ground. Nonetheless, our confidence in gold is based primarily upon the following factual observation: The Government completely and utterly lacks the ability to print, debase, devalue or desecrate gold in any way. Governments/Central Banks/Monetary Institutions do have the ability to sell their holdings of physical gold, however, widescale conversion to the fiat currency system has largely reduced the influence that these entities may wield over the gold markets. Going forward, there appears no end in sight to the amount of money that the governments of the developed world will spend to support their economies. These "bailouts" will, of course, be financed by borrowing from the developing world, furthering the status of the United States as debtor nations. Once the appetite for Western Government debt has receded, the printing press will remain the only viable source of financing for subsequent Government rescue efforts. Additionally, the dilution of the dollar will allow the US Government to satisfy its geometrically increasing obligations with greater ease. Given this scenario, gold should remain a bastion of safety and a store of wealth. Of course, you may believe that this Recession is nearing an end. Officially, we would beg to differ.
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