Bilow, this discussion is probably better transferred to the Currency and Global Capital Markets thread:
Subject 20640
But a few points to make about gold. Some of history's WORST inflationary periods have occurred during periods when gold as the predominant backer of currency. Whether it be the Spanish conquest of the Incas and Aztecs, which led to massive inflation throughout Europe. Or the American gold rush, where eggs would sell for $1 dollar a piece in the mining camps.
But gold has also led to some serious economic depressions, such as when the SS Central America sank and help to compound the "panic of 1857":
memory.loc.gov
It was also under the gold standard that the "panic of 1907 occurred:
eh.net
Thus, financial panics can occurr, and stock markets crumble, whether under the gold standard, or under Fiat and a FRB.
One other point. The US holds, by far, the greatest reserves of gold by any government on the planet(8,600 tonnes). AND that gold is currently valued at $42/ounce, WELL BELOW the current market price.
All told, global central banks hold approxmiately 34,OOO tonnes, or about 8 years worth of annual demand for the metal. That is gold that can be sold into the market to maintain equilibrium against their Fiat currencies, should the need arise.
moles.org
And since gold can be confiscated by the government, as it was in the US during the 1930's, it's not necessarily a safe investment. Additionally, since the US has been issuing inflation indexed T-bills, the whole purpose of gold has been cast into disrepute.
Now does that mean gold is useless? No. But the circumstances under which it would achieve the status it once held are so dreadful to contemplate, that one would be better off buying food and ammunition (and cigarettes) as barter items.
The bottom line is that so many of the worlds commodities are denominated in US dollars (like oil), and the systems so integrated into using the US dollar for those transactions, that any change in the medium of exchange (like OPEC nations only accepting gold in payment for oil) would be so disruptive to the global system, that they would suffer even more greatly as the US focused upon no longer depending upon their export to the US for our needs.
But what we need right now, throughout this world, is a strong sniff of inflation, to compensate for the global deflation we've seen over the past several years.
So for those who are properly diversified in those sectors that might benefit from such inflation, they will profit. The people who will suffer are the savers.. But then again, isn't that the problem? Americans are not savers? If they can borrow money now, and pay it back with cheaper dollars later, they stand to do alright (like those who puchased real-estate in the late '70s).
But the problem is, as I've stated before, competing global currencies, and the economies they represent, are not offering competitive returns of value. Sure, they might offer more in interest rates, but they have depreciated in value compard to the USD. Thus, were I Japanese or European, I could hold USD paying 1%, and if the USD inccreases in value against the Euro or Yen by 10% over the next year, I've effectively made 9% return on my money.
And this is definitely a scenario I see as possible in Japan, and to a lesser extent with Europe.
I would enjoy discussing this further, but we should do it on the other thread (it needs to action over there anyway.. :0)
As for "bubble cycles", you're quite right, under previous financial systems. But we've had our bubble, it broke, and now folks are trying to decide if they should buy into the panic to be in on the beginning of the 20 year return. It may take 20 years for the Nasdaq to see 5,000 again (I figure 5-10 years), but that's 100% return over 20 years, or 5% per annum. Considering that current interest rates are only paying the same amount in 10 T-bills, it's obvious that expected returns are currently equal between holding bonds and equities.
But given that the Nasdaq "regenerates" itself, by throwing out non-performing companies, and replacing them with newer, more vibrant ones, the odds are great that the Nasdaq will see 5,000 within the 5-10 year period I outlined, thus making equities more attractive than holding bonds, and CERTAINLY more attractive than holding cash.
As for gold, it will only rise should the Central Bankers want it to do so. They have tremendous ammunition available to them with regard to moderating the price of that metal, and I fully expect they would use it, should they detect systemic risk.
Hawk |
