Gold: The Ultimate Confidence Trick

In the mid 80’s I went to an interesting lecture by a well known American economist about the coming collapse of the Western financial world. America was borrowing too much and it was all going to go to hell in a hand basket. The lecturer said at the time to sell your real estate and buy gold. As I was a university student my pockets were empty so zilch gold was bought by me. Gold was on the up at the time but for the following 25 years slowly trickled down and real estate in that country boomed (with a couple of blips). So much for the bold predictions.

goldbars1But gold is booming again – it’s all the rage. Gold is money – no doubt about it. Most will say this is nonsense but gold is firmly embedded in our human psyche as the ultimate means of payment and store of value. It’s value rises when people are fearful and uncertain – like now. So gold is the ultimate confidence trick having scant use for anything much at all but is valuable because people believe in it

So what now for gold? Rather than argue about whether gold is rising one should see that the value of cash is falling. In the US the printing presses are out and while there may be a pause in the short term – medium to long term the Feds will crank them up again. Europe is in a mess – and let’s not start on Japan. These governments’ debts are the biggest bubbles in history. Just too much debt to deal with for many, many years to come. Confidence in cash is diminishing so it is no longer working as a store of value in much of the world. This can only be good for illustrious gold.

I am not an economist or an investment adviser but I myself invest in stuff and I like gold for the medium to long term. On the advice of an investment adviser I recently sold a small portion of my gold stocks. They were expecting a small correction which hasn’t eventuated yet. George Soros, who calls gold the ultimate bubble, dumped almost his entire stock in bullion, US$800 million, in the first quarter. While John Paulson, hedge fund guru, has kept his stake in gold. The truth is nobody knows what the future holds – the planet is a huge rotating mass awash with complex dynamical systems where tiny changes in events can lead to wildly unpredictable outcomes. And none of us can fully understand these systems to be able to predict outcomes with any real certainty.

But with common sense and a dispassionate outlook we can still look for probable outcomes and gold is likely to remain strong – probably.

Here’s a recent quote from Peter Munk head of gold miner Barrick Gold, the world’s largest gold producer.“Gold today is no longer related to the normal economic cycle of supply and demand, jewellery, Indian wedding seasons, rain in the Middle East. All those things are passé, forget about them. Gold is driven today by one overriding and, I am afraid, at least in my opinion, an irresistible and irreversible trend. A fundamental, global and growing insecurity… growing lack of confidence of the world in everything they were brought up to believe. Institutions, insurance companies, banks, issuers of mortgages, ratings agencies, equities, sovereign debt, Federal Reserve Banks. Portugal and Iceland. Greece and Spain. Currencies. What is left? What is left? Famous last words.”

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