Tuesday, January 6, 2009

On Gold; or, On, Gold?

The Financial Times.com has a piece on gold that concludes:

"The clear alternative to the dollar in 2009 is not other currencies but that ancient form of money: gold. Precious metals could emerge as a hedge for investors suspicious of central banks and fearful that inflation will be the simplest solution to the challenge of global deleveraging."

Leaving off the hedge "could" in the second sentence, the message is to consider buying gold. Of course, this is not news. The major point of gold is succinctly addressed by Naked Capitalism in a comment on this FT article:

"For the record, my Japanese buddies (who among them control a huge amount of investment funds) argue that this is rubbish, the amount of gold is too small for it to serve as a meaningful money alternative."

While Naked Capitalism does not specifically endorse this view of certain Japanese, the wording that the Japanese view is "for the record" raises the question of whether NC meant to approve of this view.

My view of the Japanese view is to disagree most strongly. It doesn't really matter how much gold there is. There is much more gold around than in 1930, when all the world that mattered was on a gold standard. Whether gold is priced at $1000, $10,000, $100,000 or $1,000,000 per ounce is irrelevant. Gold is accepted by most people in world as a store of value, does not tarnish, and the quantity of accessible gold cannot change by much yearly. So, it is indeed possible for gold to be money again.

However, given that we have "been there and done that", I suspect that it would take a disaster of horrendous proportions to go back to gold rather than on to some other standard.

Given that gold pays no interest, usually costs money to store, and can be confiscated by governments as Roosevelt did here, it has negatives that "money" such as fiat money lacks.

I agree with Mish in his post today that there is no point in predicting the price of gold in 2009.

However, it is always interesting to look at the chart with standard moving average techniques.
The declining 200 day moving average shows GLD to be in a precarious position. If the deflationary theory continues to hold, GLD will trend down to re-enter a bearish posture. (Not shown is the more positive chart vs. the 50 day MA.)

It makes sense to own gold as a hedge. This should be a bullion equivalent such as a Krugerrand.
I own gold and root against its "success".

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