In Defense of Gold! Gold Bugs and Paper Watches

Written by Scott Carter

Posted on 16 Apr 2013

man holding stack of gold coins

So what are we to believe about gold prices? Is the “Gold Era” over as declared by Société Générale? Is gold a strong “sell” as advised by Goldman Sachs? Is gold succumbing to a bear attack as stated by Bloomberg?

China’s economy has slowed down, and their demand for gold has slipped. So, concerns about Asian buying power have apparently sent gold lower. But is that all that was propping up the world’s most precious metal? Now we hear that Cyprus may be selling part of its gold reserves to fund its bail out. Is there added concern that other broke and insolvent countries will follow? Is there sudden anxiety over the Fed turning off the printing press? Or that it will perhaps stop pumping billions and billions into bonds to buoy up the stock market? For those of us that monitor government behavior minute-by-minute, such action by the free-spending Fed seems highly unlikely.

What’s very clear is that none of this paints a very pretty fiscal picture for the future. Gold has been a long-time hedge against inflation, economic instability, and overall financial upheaval. It has been the world’s monetary safety net and a global currency “catch-all” for countries that stumble, fall and ultimately collapse. Gold has always represented longstanding insurance against worthless money. So all of this gold selling begs the question … what has made easy money suddenly so valuable? Why on earth would anyone put their eggs in a paper basket?

The presiding theory about gold’s unyielding store of value and catapulting climb over the past few decades is that the housing crisis, quantitative easing, foreign wars, and terrorist attacks have made gold a safe haven alternative. But wait a minute … the housing market has not really recovered, we are still at war overseas, the Fed is still printing money daily, there was just another unspeakable terrorist attack in Boston yesterday, and stocks are getting fidgety again. The bottom line is that the global economy continues to stumble.
Back in 1975, gold lost half its value. Many people declared it the great gold bust. They called gold dead, defunct and obsolete. Others jumped off the golden ship and back into the markets. By 1980 gold rose eight times in value and has not really looked back. Gold has now been so strong for so very long that some experts believe this is a correction that is long overdue. To smart investors; however, it is a window of opportunity to get a designer asset at an everyday price. It is perhaps the gold bug’s ultimate fantasy. So will bargain hunters swoop in for a quick return?

Here are today’s economic realities. Interest rates have nowhere to go but up. Even if the Fed decides to continue keeping them artificially low by purchasing bonds … they can only do so with “quantitatively eased” money. History is very clear in demonstrating that mass money printing has always been bullish for gold!

All of this is perhaps best captured by the sentiments of a long-time gold investor who deliberated briefly over the recent gold down turn and then said, “What’s all the gold panic about? We’d all still rather wear a gold watch than a paper one!”