Monday, April 5, 2010

Tangibles Should be Things You Can Touch

This post is inspired by all the advertising and discussion I have been reading over the past year or so about owning precious metals. There is a lot of information out there urging us to invest in precious metals such as gold and silver, and much of this makes sense given the state of the economy and the increasing decline of our fiat currency, the dollar.

I have to wonder, however, if the market for gold in particular is being manipulated by the powers that be for their own benefit. By "the powers that be" I am referring to the government, banks, and investment firms. I have noted before the interesting status of the price of gold, that it seems to be maintaining at between $1,100.00 and $1,125.00 per ounce for several months now. Having read a little about the nature of the commercial gold market and its manipulation (here), I am convinced that the price of gold is being manipulated to forestall the collapse of the dollar and everything attached to it.

I do agree with those "experts" who espouse owning gold (and silver) as a tangible which will hold most, if not all, of its value no matter the economic conditions. I particularly agree with those that advise physically owning gold rather than investing in gold "on paper".

I don't think that I am the only person who has noticed the exponential increase in advertisements and advice to buy gold. I can hardly turn on the radio, open a magazine, or visit a blog without some exhortation to buy gold. I note that this increase coincides with the rise in the price of gold over $1,000.00 per ounce. Given the money spent on the advertisements, I have to wonder what the profit expectation would be from the delivery of so much gold. If the gold has so much value now due to factors such as the weak economy, a weak dollar, and the possibility of impending economic collapse, why are so many companies eager to sell gold now?

Then the answer occurred to me: They aren't selling gold. Think about it. How many of these purchasers of gold are actually taking physical delivery of the gold? How many purchasers are simply holding pieces of paper which states that the buyer has purchased a certain amount of gold from the seller, and nothing more? What are these pieces of paper really worth? What does a purchaser get if he/she demands delivery?

The gold market consists largely of traders who buy and sell pieces of paper representing "ownership" of gold. The vast majority never see or possess the gold. The pieces of paper are worth what the traders say they are worth so long as everyone believes that the gold exists. If someone tries to call in their gold, the market rules generally allow for settlement of the gold contract in cash. As soon as someone seriously makes a substantial demand for delivery, or when the "cash" in the cash settlement is worthless (ala Zimbabwe dollars), the whole scheme will come crashing down. It will crash because there is nowhere near enough gold to fulfill the contracts.

If the price of gold starts breaking out into new highs every day, as would be likely in an economic collapse, delivery might be demanded but it will be too late. This will occur at the end stage, where survivors try unsuccessfully to pull what they can out of the rubble of the collapse.

This scheme of selling gold on paper works particularly well when, as now, gold prices are high. There is little risk that the big players in the market will ever have to deliver the gold, short of an outright economic collapse where the dollar becomes worthless. If the price stays the same or slowly increases, there is no reason to demand deliver of the gold, as it appears to be a good investment. If the price of gold declines, the owner of the contract will sell the "gold" in the contract without ever having seen it to avoid further loss.

The following analogy is how I see the current gold market: You give me a thousand dollars to invest, taking it on faith that I have invested in widgets. Of course, there would also be a small brokering fee and/or fee to store the widgets for your convenience. If the price of widgets holds or slightly increases in value, you will probably leave the "investment" alone and I will be able to use the money as I see fit. If I am smart I will have many investors just like you so that I can either live off the interest by investing the money for myself, or I will have enough of a cash cushion to pay off those investors who want to withdraw. With this system I could take advantage of most investors, if not all, by arbitrarily declaring that the price of widgets has declined by forty percent. Those investors who decide to take their losses and cash out will have abandoned forty percent of their investment to me without me actually investing anything in widgets or providing verification that the widgets exist. If paper money should become worthless and widgets worth their weight in gold, good luck collecting widgets from me as I will have disappeared in the chaos of the collapse.

Investing in tangibles, as those of us preppers are wont to do, should only be in items we can physically possess. Only items that we possess have any value in a future economic collapse, societal collapse, or other calamity. Silver coinage, ammunition, and even cans of chili will have more stored value than any pieces of paper denoting ownership of gold purportedly held in some far off warehouse. When the collapse happens, holders of paper gold will be occupying FEMA camps with people waiting for their government checks.

1 comment:

  1. Re: “... the increasing decline of our fiat currency, the dollar.

    If the stated value, of “Federal” Reserve notes, declines enough with respect to copper and nickel, the 1946-2009 nickels, composed of cupronickel alloy, could completely disappear from mass circulation.

    According to the “United States Circulating Coinage Intrinsic Value Table” available at, the April 5th metal value of these nickels is “$0.0615744” or 123.14% of face value.