Should You Own Gold? A Rebuttal

by Wes Bridel on October 31, 2011

in Random Musings

We’re finishing up a series on gold and silver which began here.  Earlier posts in this series contained a letter or statement which I put together for an association of which I’m on the board to explain the rationale behind holding a portion of savings in gold and silver.  After putting this together, a member forwarded an article that gives very typical (and well written) reasons not to buy gold today.  We thought it would be fun to respond point by point to this article and will do so over two blog posts…

All that’s gold doesn’t glitter

By Fareed Zakaria, CNN

What do Hugo Chavez and Glenn Beck have in common? The socialist/populist president of Venezuela and the right-wing talk show host often have strange ideas – just not the same ones. But it turns out, they are both gold bugs.

Now, many people have been investing in gold. But Hugo Chavez wants to horde it literally, physically. The Venezuelan government controls the world’s 15th largest stockpile of gold: about 365 tons. But, like most gold investors, it doesn’t really have that gold. At least not physically. More than half of Venezuela’s reserves are held overseas in London, New York and Zurich. If you ever visit the New York federal reserve, you can even see it in the underground vaults, neatly labelled as Venezuela’s.

My Response: This is totally false.  I don’t know if he’s intentionally lying or if he’s simply unaware of the truth.  First of all, hardly any of Venezuela’s gold is in the US.  It’s almost entirely in London.  Second of all, there is no gold “neatly labeled as Venezuela’s” or any other countries.  As a matter of fact the Federal Reserve fights all attempts to audit their holdings.  They had admitted in the past to swap deals and the fact that they stand ready to lend out gold to control the price.  This should make any country believing they hold gold there very nervous.  The same goes for London. At the COMEX hearing of March 2010, the LBMA admitted that there are 100 pieces of “paper gold” (figments of the exchanges imagination)for every piece of actual gold.  I’m no fan of Chavez, but in this case he is being extremely wise to get their gold out now while it’s possible.  There are way more people in this world that believe the own gold or silver because they have a piece of paper that says they do, then actually do.  Fortunately, the fund we are buying is closely audited and actually holds the metal they say they do with no funny business.

Mr. Chavez, as you know, doesn’t like the West; he doesn’t like this predicament. So he’s announced he wants his gold. But how do you transport 211 tons of gold across the seas? Well, by spending lots of money. You have to insure against a gold heist, like the one in The Italian Job. Experts say Mr. Chavez could spend at least 4% of the total value of his gold on insurance, with more on security and transport. Add it all up and you could get about half a billion dollars. That’s serious money for any country, let alone one that has negative growth rates as does Venezuela these days.

My Response: Am I stupid for insuring my home against fire?  It costs me money every year and is probably not going to burn down?  I don’t think he’s stupid for making sure that he actually has the thing he thinks he has.

What in the World is Hugo Chavez thinking?

Actually: He’s not alone. From the ancient times of Egypt’s Tutankhamun to the Gold Rush in the mid-19th century, right through to the modern day, we’ve always been attracted to gold. Who can ever forget the appropriately named Auric Goldfinger, from the James Bond movie, who said, “This is gold, Mr. Bond. All my life I’ve admired its color, its brilliance, its divine heaviness.”

My Response: Apparently Farid is totally blind to the fact that gold and silver have always been money.  Plato defined the characteristics of money thousands of years ago and gold and silver fit them perfectly.  You can use or oil for money but it’s too bulky to be useful.  You could use wheat for money except that it rots.  You could use fine paintings for money except they are not divisible.  You could use paper for money, but it’s too easy to reproduce in endless quantities (woops, that’s what we use!)  Gold and silver on the other hand have always been money, not because “they are shiny”, but because they hold vast value in a small container, they stay in good form forever, they are divisible, and they are in limited quantity which can only be added to in small amounts each year as they are mined.  These are the reasons they make the perfect money.  These are the reason that every time in history a paper currency crashes (because governments always print too much of them for their own power) the people of that area go back to gold and silver.  It’s not mystical, it’s practical.  And it’s historical.  Platinum serves all these purposes as well, but we’ve only known about it a couple hundred years so it doesn’t have the same historical place as money.  The market is not stupid.  it recognizes the danger and it is moving back to what has always worked in the past.
There are many who share Mr. Goldfinger’s sentiments around the globe. especially in times of confusion and uncertainty about governments. People worry that governments are keeping interest rates too low, that will cause inflation and could weaken the dollar and other currencies.

The answer: Store Gold – something that has always been seen as a solid, substantial hedge against inflation. If everything else collapses, the theory goes, gold will hold its value. For this reason, in the last decade gold prices have risen more than 600%. Is this a rational response to legitimate fears of inflation? Or are we in the middle of a bubble?

There are signs that suggest a bubble. The fact is, global demand for gold in industry and jewelry has actually declined by 18% since 2004.

My Response: Again, Farid seems totally ignorant of financial history.  Why is he even bringing up jewelry?  That shows he views gold as an industrial commodity rather than as money!  Really, there’s no reason to even continue addressing his thoughts if he doesn’t understand gold’s use as money throughout the ages.  (I realize that he already mentioned it’s use historically, but he did so as if it were a pretty bauble rather than as the basis for trade.)

This is the 7th post in a series on silver and gold.  In the final post, we will finish this letter with my responses.  You can find all posts from this series at:  1) Gold & Silver on Sale, 2) Reasons to Buy Gold & Silver,  3) Gold & Silver: About to Take Off?,  4)  Why & How to Buy Silver & Gold?,  5) Gold Bubble?,   6) Gold Speculators or Savers?,   7) Gold Article Rebuttal, &  8)  Gold Rebuttal Pt 2.  Watch the previous economic update video series we did at: 1)  Europe Economic Update 1, 2) Europe Economic Update 2, 3) Europe Crises Explained, 4) World Economic Update, 5) US Economic Update,  6)  US Economic Update 2,  7)  US Economic Update 3,  8)  Hyperinflation Signs,  9)  Hyperinflation, Inflation, or Deflation?,  10)  Gold Update,  &  11)  Gold & Silver Update.

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