Thursday, October 18, 2012

QE3 Makes Gold An Attractive Investment.

Ever wonder why a country buys gold? If you’re a deadbeat country, you might need it for international trade. Of course, if you are printing money like crazy, buy gold now at x dollars and sell it a few years down the pike at 3x dollars. As a Government, you know what you’re doing even if the rest of the world doesn’t. Of course if you’re a country running a tight ship, buying gold could be a way of tightening up the money supply. Not too many countries are in that boat.

Normally holding physical gold for the average investor, was a losing proposition because, gold pays no interest. Well, with 8% inflation and 1% interest rates, gold is a better deal than a printed dollar. Plus if interest rates stay low like this, you’re at least making the difference between the current inflation rate and interest rates.

There is one problem, if everyone starts reaching for gold, the price will climb. The problem is the government needs to stop that from happening. They will again have to outlaw gold possession.

When I was in college in the 1960’s a ten dollar bill bought two full tanks of gas and you had a couple of dollars left over. Today a hundred dollar bill will buy two tanks of gas—maybe. The peculiar thing this time around, is that the hundred dollar bill is our biggest bill in circulation.

To the young people just entering the work force, today’s prices are the only ones they have ever seen. Everything appears normal to them. However if you had put 10 hard dollars earned in 1965 into a savings account, you don’t have the same buying power today that that ten dollars had 60 years ago. Of course the price of gold was 35 dollars in 1964.

With interest rate at 1%, bonds use to be the retirement vehicle for most retirees. Why even bother with them? Convert your savings to gold or put your dollars in a safety deposit box and apply for Supplemental Social Security (if you have no funds in the bank, you qualify).

As long as our government wants to spend a trillion dollars more than they take in in taxes, your savings are being taxed by inflation. Gold and silver have maintained their value over the ages. They are a store of value that pays no interest. If Bernanke thinks that keeping interest rates low is good for the economy, let’s all buy gold and silver. Let him covet his paper dollars, while we laugh at him.

They’ll have to start printing Thousand dollar bills pretty soon,--but doesn’t that pretty much give away what is actually going on? Of course not! If you have been poor all your life and now have a $1,000 dollar bill in your hand, you have made it! You are rich! You’ll earn 5 times more than what your dad did and you’ll be proud. Even though your pay raise each year is just the cost of inflation, it is a pay raise, as far as the average worker is concerned.

Then we have Ben Bernanke saying he will buy all housing paper (40 billion a month) (because the banks aren’t dumb enough to buy it) for two years, kind of blows me away. These people in office are going to save us, but I kind of wonder what they are trying to save us from?

I just wish I had bought gold at $35!

Copyright 2012 by Jim Brubaker


Anonymous said...


Here is another guy who would fully agree with your assessment although he favors silver over gold and gives the top 14 reasons why silver is the best investment right now!


Anonymous said...


They don't have to outlaw it......they can simply apply a 90% tax

Jim in San Marcos said...

Hi Anon 11:10

Thanks for the link

I'm a big silver supporter also. The silver gold ratio historically has been 15:1 So silver is very under priced or gold is very over priced. Its probably a lot of both, but either way, silver is in a good spot.

Jim in San Marcos said...

Hi Anon 7:58

I think once you get beyond 40% taxation, you're more into government confiscation.

The government has many ways of tracking wealth through the banks, but they have no way to track gold or silver unless you volunteer the information.

Nobody went to jail when FDR made owning gold illegal.

Joseph Oppenheim said...

Although I do think gold and silver belong in one's portfolio of assets. But not for speculation, just for diversification and an insurance policy on our currency...and like insurance, never intending to sell.....sure, one should sell some if a situation/opportunity presents, just managing one's gold/silver position.

Anyway, I like facts. Gold nearly quadrupled while GW Bush was president and only doubled (good, but not an unreasonable amount) so far while Obama was president.

And, inflation has remained moderate while Obama has been president/Bernanke at Fed. Many things are down in price. There is a reason why food and energy are stripped out when looking at core inflation measures.

Plus, food and oil price increases have actually been a good thing so far (other than for some) since it has helped important parts of our economy....most specifically farm and oil land prices and because it also helps some foreign economies, along with commodity price increases, making these countries good customers for US exports, even better with a lower dollar - major US corporations have never been stronger, with boatloads of cash and cheap financing costs - benefiting even the average person because of a strong stock market and bond market - sure, the bond market is in bubble range, so one should be handling it wisely, as one should have done when housing bubbled. Any investment should be managed.

As for Bernanke, I am mixed - he was part of went wrong with the banks under Bush. But, under Obama, he has a good record - the only criticism I have is he has rewarded banks too much (I agree with the Occupy WS movement).

Jim in San Marcos said...

Hi Joseph

There is a lag time from when laws are enacted until their effects show up in the economy. Usually it takes from 4 to 8 years. So I think is is a little difficult to saddle one President with credit or blame for what happens during his watch.

IMHO our current mess can be blamed on Congress with the repeal of the Glass Steagall act back in 1990 and other banking modification. (We were smarter than our counterparts of the 1930's and didn't need these regulations anymore)

Of course, the voter will blame the current economic state of affairs on a President rather than the law makers.

I think the next four years will be very unkind to who ever wins the Presidency.

Congress means well, but sometimes fails to understand how the laws can be abused. Time is the true test of any legislation.

Bernanke has me wondering just like you. Maybe the picture will be clearer after the election.

Joseph Oppenheim said...

There is a lag time from when laws are enacted until their effects show up in the economy......

Not always, especially in financial markets.....they usually are leading indicators and react very quickly, sometimes even before a law is actually passed....the trend in the price of gold is usually an indicator of the future of other things. Currently, the trend over the last year or so for gold has been down from its high around $1900. Not a big drop and it has picked up recently...but, still down from its peak.

Also, not all of Glass-Steagall was repealed...FDIC insurance was an important part of it and not only was it not repealed, but recently extended from $100K to $250K, etc. Plus, now banks, etc now have to pay more to the gov't for the insurance. But, I do agree that the repeal of the separation of banking and investment contributed to the mess.

As for the future, one thing I learned.....sure, trying to anticipate things is important, but it is also too risky to make large speculative bets on, .....when investing, I ALWAYS make sure the investment makes sense as things stand currently, no matter what happens in the future. The same with major decisions in my life. Sure, the world could end, etc, so I don't include that, etc in investment plans. But that is also one reason I think FDIC, NCUA Insurance is so important. The little guy actually has some advantages. For real catastrophe, just being a positive and happy person I think is the key....I just go with the flow - if I died tomorrow that's fine.....that is where spirituality comes in and I'm not talking about religion, per se, but a more inclusive approach....Steve Jobs got it. It really are the little things in life which mean much more than money and most of them, no one can ever take away from me.

And, sure, a president often gets blame or credit for things, sometimes unjustly.....that is one reason I like to look back at my past presidential voting decisions to see if they have proved right or not - I like to use Wikipedia's ratings on past presidents as a rough guide. But, there are things a president does which can be rapidly evaluated, especially from what I want from a president. Intent, too, is sometimes more important than result. I love the film, "Elizabethtown" and its message that sometimes failing really big is what is really good, because it meant someone tried to accomplish something really important, rather than just playing safe.

Anonymous said...

Great article on the economy. May need to view in 100% mode (box to change at top of screen)

Anonymous said...

Machine gunning the life boats, strafing the refugees- so goes the
Fed's gold price manipulation. I own Au physical and it's hard not to feel the constant hits.

Jim in San Marcos said...

Hi Anon 8:52

Thank you for the link.

I don't think we can accuse Ron of being a man of few words, but it is a good read.