The quack economist John Keynes called gold a barbarous relic but he was just talking his butt. Central bankers the world over have applied great diligence in observing the behavior of gold relative to their funny money. Thus if the central bankers are concerned about gold, it would behoove our dear readers to do likewise. We believe that one should buy gold early and often.
We will return frequently to the many topics surrounding gold but in this missive we will state that its value is vastly under appreciated by most money managers and I would hasten to add that we are all money managers. The recent economic troubles plaguing the world have caused many professional money managers to re-evaluate their stances toward gold. Greenlight Capital went the extra step of converting all of its paper gold holdings to physical bullion in recognition that gold was bound to revert to the mean in terms of valuation.
Some studies note that gold holdings of 5-15% reduce risk and increase returns by 6% or so. Perhaps the study over sampled the period 2000-2009 when gold showed its best performance since the 1970s.
But this point aside, we would note that the pathologies which central bank currencies are suffering - acutely since 2008 - provides powerful incentive to at least diversify gold holdings. But why gold? Why not something sexier and more complicated? Haven't you read the myriad jeremiads against gold?
We have heard all of the calumnies against gold and find them wanting. The most powerful argument in favor of gold that it has always been money and it cannot be manufactured out of thin air like paper and electronic currencies. Its physical existence cannot be manipulated by a few mouse clicks or a fecund print shop.
We admit that the price of gold can be manipulated but we also note that the central bankers losing control over the price of gold - hence its robust rise in price over the past 10 years. But this begs the question: is gold rising or are other monies declining. While ultimately the answer is a combination of both, the primary answer is that other currencies are imploding. Thus gold serves as a hedge of protection for mismanaged currencies.
We also accept the notion that gold is not truly an investment. It was never intended to be. It is only when irresponsible central bankers - a redundant phrase - debase currencies in excess that gold asserts its role - not as a store of wealth although that is indeed one of its features - as a thermostat indicating that trouble is afoot. The incessant rise of gold since 2000 indicates loss of faith and fidelity in the currency and market place. Disease in the currency readily metastasizes to this economy it serves.
Gold should be around 2200 USD assuming it correlates positively with the money supply or price inflation. Gold has not kept pace with this standard due to massive suppression schemes. Thus its reversion to the mean gives it still much upside potential - but only because price suppression schemes are failing and monetary realities are beginning to assert themselves.
We will say much much more about gold in the coming weeks. Visit the Selected Links on our home page to begin studying the details gold and its preeminence as money.