Friday, 15 July 2011

Scour your house for your old gold. Melt down your memories of the past.

The gold bull market continues

Gold at $1600 US per ounce.  Is it such a good idea to be so bullish? 

by Tom Thorne
The price of an ounce of gold is nearing $1600 US ( actually yesterday $1589.56).  For someone who is old enough, like me, I can remember when gold was $32 US per ounce. The rise in price reflected in US dollars over the last 50 or so years is incredible. In those days major currencies were supported by gold reserves at this $32 value point. So what has changed?
Coupled by the debts of governments and individuals and the shaky world economic recovery, gold is seen by many investors as a hedge against loss of value of their personal assets but those assets are seen in old economic terms. Currencies without a gold standard to back them, are now simply pictures of Queen Elizabeth II, US presidents, or in our case in former Canadian prime ministers and are represented by virtual dollars on trading computers. They are only important because people, businesses and governments accept them. 
The truth is that the price of gold could fall and fall quicker than it went up to its current price. Is gold worth $1600 an ounce? If it is then the US is sitting on huge assets of 9300 tonnes of the stuff. That makes their concerns about debt ceilings look pretty small if they decided to use gold to settle their debts or back their currency once again. But it is all a house of cards.
If the US or other governments holding gold reserves flood the market with bullion then the price would drop as the supply increases. So no one seems to want to do that. In addition, Germany has 3400 tonnes, Italy 2450, France 2400, China 1200 and Switzerland about 1100 tonnes. Perhaps with these reserves currencies should revert back from being pretty printed pictures to being backed by gold reserves? Not likely.
Environmental and social costs mount
At $1600 per ounce it is profitable for companies to tear down mountains, destroy environments in the third world to find more or rework with toxic chemicals the tailings of old gold mines long forgotten as “mined out” when the price was much lower. Television commercials for companies willing to buy old gold jewelry to melt down are seen daily. The demand outpaces the supply and creates the inflated $1600 price point.
We seem to be in a Gold Rush these days. The real question we need to ask is how long is this gold bubble going to last?  In my view it will lose steam unless there is another fiscal foible like 2009 or the US Congress decides to play chicken politics with debt ceilings and debt reduction. Gold just sits in vaults and so it has little impact on day to day economics.
Faith in pretty picture currencies is only as good as people’s faith in their future and whether they are prepared to accept these shabby notes to as a medium for their transactions. The economy, now instant and 24-7, is not really based on perceptions of the public as it is by computers that are programmed to trade when conditions are right for profit. Since those perceptions are now being altered literally at the speed of light, time to decide what to do is the most valuable commodity we have. Perhaps it should be assigned a value to trade?
Time to think needed.
If time was valued by the nano second it would be a priceless on any commodity market. This valuable commodity is now so compressed that decisions are made by machine program trades as key variables for any commodity to rise or fall in value. Time is the most undervalued commodity now in use. It has a lot of demand and it is in short supply. In an information knowledge economy time is literally of the essence if useful decisions are to be made.
Gold like any other demand commodity is traded 24/7. If we had a simpler economy say when it was $32 per ounce, when this commodity traded at a leisurely pace and its price was fixed to maintain the value of major currencies. The price was not pure form without substance as it is now, it supported value and as a result economic stability.
When gold was removed as the basis of currencies these currencies became pretty pictures and began to fluctuate wildly and then constantly under the control of computerized systems. Governments turned on their currency printing presses. Gold began its rise in value as the currencies came off the printing presses in ever mounting inflated amounts. As these currencies began to trade on their own and there was more of this stuff around the price of gold rose in terms of value against these inflated printed pretty pictures. Hence gold is nearing $1600 per ounce.
Because the pretty pictures are inflated that is the value needed to trade one commodity against another. The pretty pictures are not worth a whole lot.  The real value is something less given the debt of those central banks printing the pretty pictures. That real value will find its value expressed in some kind of new perhaps virtual value system that will replace those piles of dog eared tangible bank notes.
© Copyright 2011, Tom Thorne, All Rights Reserved

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