Often, those of our fellow citizens who have speculated in gold have done so out of fear that the U.S. dollar will collapse in value. Their belief seems focused around the character of the dollar, fiat currency backed only by the promises of our government. They see the course of government spending over the last thirty years or so as dooming the value of the dollar. This may well be so; but it brings to mind the story of a gambler in the old west who stormed out of a gambling house raging, “The game is fixed!”. Fixed or not, however, two nights later a friend spied him back in the gambling house. Curious, the friend approached the gambler and asked, “Don’t you think the game is rigged?” The gambler shrugged his shoulders and replied, “Oh, it is; but it’s the only game in town.” The Chinese, of course, know that the size of the American economy makes the U.S. China’s most valuable trading partner; so their government ignores the price of gold, cheerfully accepts our dollars and continues to export to us.
Ours, after all, is the world’s largest economy; and while the dollar may not be the only game in town, it is so important a part of the world’s economy (not just in trade, but in widely held U.S. money, bonds, stocks and other assets) that if the dollar tumbles in value all other currencies (they’re fiat currencies as well) must also fall in value. In these circumstances, the most holding gold as an asset can do for its owner is to maintain his wealth; but what if there is no catastrophic failure of the dollar? Certainly, it is in the profound interest of the the U.S. Government to guard against this to preserve its credit; and the looming debate in Congress over future spending and taxation gives clear evidence that our usually inept, contentious and lackadaisical legislature is aware (if not seriously alert) to this. This spells out the gold speculator’s risk. Gold is a non-performing asset. Unlike dividend paying shares of stock in a corporation, gold’s value is locked into its sale. You can make no money, if money is to be made, until you sell it; which brings us to the crux of the problem for those speculating in gold. The speculator needs to know when to fold his hand; and those who did not when gold was higher this year face holding a losing hand (as I write, gold is down 20% from its high this year).
In the past (normal times in my view) 80% of the world’s gold supply has gone into either jewelry or (mostly east of Suez) been hoarded. But these are not normal times. On the world stage spikes in gold’s price are largely supported by the mercurial plays of speculators managing very large money funds. It seems that when they need to prop up the apparent profitability of their fund they’ve gotten into the habit of buying gold. Because the funds are so large, their increased demand drives its price up and allows them to show their investors an increased profit, albeit paper, at the end of a quarter. That’s not to say that there has not been some real new demand for gold, it exists in the Chinese market. China’s new economy has enabled China to become a major consumer of gold; but here the key word is ‘consumer’. Like the people of India, China’s new gold buyers tend to buy it and hold it. The reasons for this behavior are more cultural than anything else; but they have created a new ‘floor’ for the price of gold. Unfortunately, at this moment no one knows what the dollar value of that ‘floor’ may be; so this new demand has created an opportunity for speculation. While this seems to leave the question of the dollar’s vulnerability still open for discussion, that value has to be considered in the context of the spread of wealth to other parts of the globe. Indeed, Indian gold merchants are currently horrified that gold sales are off by more than 28% when compared year to year. As a word to the wise, the Rupee has collapsed while the dollar retained its value.
The world we live in is economically interconnected; and as recent events in the U.S. and Europe have demonstrated, their affects on our economy are unpredictable. Let us go to the obvious however, this interconnection means that a collapse of the dollar would certainly be contrary to the general interests of those holding any dollars or dollar denoted financial instruments public or private. So who does benefit from the current volatility of gold prices? Obviously, those who are smart enough, or lucky enough, to sell on the metal’s ‘highs’ - the successful gamblers. But as with any bubble, when speculative demand collapses, the price of gold must collapse to some value that gold users can accept; and those who have not unloaded their high priced gold must suffer. Fortunately I have an answer for those who wish to guard against the devaluation of their gold - Pasta!
Speculators arise! Pasta is your future! Unlike gold, pasta can be consumed and yield some nutritional benefit to the consumer. What is more, wheat harvested and stored in the ancient Middle East (but discovered in our own time) has been found to be “alive”; so in as much as pasta (carefully stored) can easily outlive any one of us, it has lasting value at least as great as that of gold. Not only that, pasta has world wide acceptance that is, in the ultimate, greater than that of gold (Ask a starving man anywhere on Earth if he wants a bar of gold or a bowl of pasta). In fact, in a world with shrinking water resources, it is clear to me that in the foreseeable future pasta must out perform gold as an investment. You heard it here first.
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