Bill Bonner of Daily Reckoning fame, says about the dollar in particular that you can either control its quality or its quantity. Such a brilliantly simple concept goes to the heart of the gold story.
Well before he came into focus as the new Fed Chairman, Ben Bernanke made a famous speech in which he said: "The US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost Of course, the US government is not going to print money and distribute it willy-nilly! "
He clearly expressed his willingness to print dollars, making only a feeble attempt at upholding their quality.
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Investing in gold: the alternative to paper money
Once you take on board the simple principle that gold is the alternative money, then why would you favour pound sterling, US dollar, euro, even the Swiss franc or Japanese yen, all of which can be printed by pressing a button, against the one currency that cannot be created or destroyed?
Instead of thinking about how high the price of gold has risen, just consider that it is not the gold price that is going up, but the value of the currencies that is going down; and why wouldn't they? Imagine finding in a cellar in Florence a hundred Mona Lisa canvasses, all painted by Leonardo da Vinci, all of identical quality and size. Their value would be much less, as would the value of that wonderful painting hanging in the Louvre. If Central Banks increase the money supply, they will decrease its value. It is an inevitable process and one to which they are absolutely committed.
The only possible hope for an indebted society, peopled by indebted citizens, is to monetarise its debt. In other words, print the money to pay the interest and devalue the currency so that the pain becomes less - unless, of course, you're the mug without any debt with your money in the bank having not bought gold!
Investing in gold: gold mining shares
From an investment point of view, the shares have, of late, been under-performing the metal, although the latest price for Merrill Lynch Gold & General is at its all-time high. Assuming gold remains resilient and in due course finds its way even higher (and we certainly expect that to be the case), then the mining shares will play catch-up. For a while, the metal will continue to lead the shares, then for a while the shares will take over and lead the metal. Over the long term we would expect the investment in shares to benefit by a ratio of up to 3-1 compared to gold bullion. In the interim, there will be some volatility and pull-backs, but over the long haul gold and gold mining shares can only go one way.
You may not have noticed, but the price of gold has risen to a devilishly good level, holding currently at $666/oz. But wait for it, there is more from its low in 1999, it has increased by 166.6%. And if you think it ends there, it doesn't, because the retracement so far following the high in January 1980 of $880/oz and the low of 2000 of $252/oz, is two thirds (or rather 0.666). Make of that what you will, our only observation is that for those who have been in gold a long time, this is hardly a beastly event!
By John Robson & Andrew Selsby at RH Asset Management Limited, as published in the Onassis Newsletter, a fortnightly newsletter that gives insight into the investment markets.
For more from RHAM, visit https://www.rhasset.co.uk/
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