Financial advice from fish & chip wrappings

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After a busy day my youngest son and I picked up some take-a ways for dinner, that good old kiwi favourite of fish & chips, I noticed in the newspaper wrapping a big picture with gold bars and that caught my attention.

The article was called: “Gold Plated Investments?” by Chris Worthington, New Zealand Herald, 23rd November 2010. With a bold statement highlighted: “History proves protecting wealth by buying gold is folly."

I’m not sure how much history Mr Worthington has read, at a guess I would say not much. I did a Google search and found the source of the article on the Gareth Morgan web page
Unfortunately there is no place to leave a comment, also I could not help but notice there is only a button for “Like” at the bottom of the article but no "dis-like" button, wow.. this is a rose coloured web page! (Are you happy or.. happy with this article it's your choice)

Well I have this blog so will vent here instead:
Worthless paper moneyHistory is littered with the debris of fiat money failures, that is to say money with no backing of hard assets like gold. There is not one fiat currency that has survived long term, not one! Yet gold is still gold and still worth something while you can’t say that about paper money when it fails. So on the matter of history proving that protecting wealth by buying gold is folly, I would invite Mr Worthington to read about Weimar Germany before World War II or Argentina in 2001  or Zimbabwe or any paper currency in the history of the world that has been given enough time and rope to hang itself with.

Bundles of Zimbabwe currency
Some people might say, Zimbabwe? What has a banana republic got to do with the US dollar for example? Everything! The US is following the same financial principles of Zimbabwe and I believe that Zimbabwe is a warning to the world and not something to laugh about, they ran out of money to meet their commitments and instead of changing and being honest about fixing things they printed money instead. How is that different from what the US is doing? After hyper inflation the Zimbabwe dollar was replaced with a new version and the old one became worthless, so that currency will never ever become more valuable compared to gold because it is extinct along with any saving in that denomination.

Below is a link to a nice quick review of nine failed currencies as an example:
http://www.mint.com/blog/finance-core/hyperinflation-the-story-of-9-failed-currencies/

This is just a small sample! In-fact according to Standard and Poor’s between 1975 and 2005 no less than 35 national currencies have failed (43 if you count the repeat offenders) In all the above examples Gold is and will always be more valuable, so I don’t think Mr Worthington is looking at a broad enough picture.

Another example Mr Worthington makes as follows:
‘New Zealand gold investors might be surprised to learn that gold, in NZD terms, is actually down some 12 per cent from the peak in March last year”
First, people who are gold investors would not be surprised about that at all, second this seems an extremely narrow point against gold, why did Mr Worthington not publish the gold chart in NZD like I have below? Because it would obviously make his point well… seem pointless when you look at the big picture:


In-fact if some fund managers would have just bought gold back in 2000 they would now be heroes as gold has out performed the markets by a very long shot for the past 10 years.

I do agree that there are times to invest in gold and times not to, taking Mr Worthington’s worst case example of investing at the very peak and then selling at the very bottom, that is human nature, to follow a trend like housing until it is well over bought (when there are funds of some kind available to do so). I do expect that to happen to gold again relative to other things but not to currencies that we have in circulation now, the currencies we have in circulation now I very much doubt will ever become a better investment than gold looking at the big picture as many will not even exist in future.

The fact is Gold has outperformed mutual funds and the big stock markets for many years, and there are real and systemic failures in global currencies burgeoning because of debt, and debt is the nature of money with no gold backing, that is to say money today is debt based not asset based, thus will fail under its own compounding interest rate in countries where current account deficits are continuous (Like New Zealand, UK and America)

Mr. Worthington says Gold pays no interest, correct that is because it does not need to, it is an asset not debt. If paper money did not pay interest why would anyone want it? After all its just paper (or computer digits)

In the 80’s when gold finally came down compared to dollars, it was a different time and there were very different actions taken to “fix” the economy in America. Back then the man in Ben Bernanke’s role was Paul Volcker instead of printing money like Ben is doing today Paul made big cut-backs to really try to put the books back in order in a logical way, he increased interest rates higher and higher, while Ben is holding them down near zero by buying US bonds with printed money! Paul brought back trust in dollars by limiting supply while Ben is destroying trust with unlimited supply. These are very different times and they really can’t be compared. People did over buy gold in the 80’s but it only started coming down compared to dollars when interest rates were up around 20%! Can you see that happening today with the global debt situation? Rates like that would collapse the whole system very quickly and would not bring trust back to paper dollars, it would have the opposite effect. This is a very different time, one need’s to look at the bigger picture, where there are major cracks appearing in the faith of paper dollars with unpayable debt and ever increasing citizen anger at cut-backs.

When looking at Gold as an investment I would urge to look at it as a way to preserve saving rather than making money, for example in a paper money collapse bread will skyrocket also, but you can’t put all your savings if you have a decent amount, into bread as it will go off, while gold is a store of value that is its purpose. Take Mr Worthington’s example of an 85% fall from peak to peak that he calls conservative, the fact is it was still worth something in 2001 and that is a lot more than nothing… like so many extinct currencies and stocks are.

Look at the big picture below, then inverse it when thinking about the value of paper money, that is the same thing, that is to say while there has been inflation of “things” compared to paper money there has been deflation of things compared to gold, therefore gold has performed very well as a store of excess effort (savings). It’s a good time to hold some gold because governments like US, UK and Japan are going mad printing money with no end in sight.

London gold fix 2000 to 2011

PS using the conservative RBNZ inflation calculator $850 USD gold at its peak in 1980 was about the same in NZD as the rate was about 1 to 1 and according to the RBNZ calculator that would be $3,800 NZD now. So gold is currently less than half of the peak price in 1980, but the situation with global debt problems is far far worse now than 1980. $3,800 is calculated using the questionable CPI (I call it “CPlie) numbers, compared to housing inflation over that same time gold would need to be $10,000 NZD per ounce (USD $7,400)! That goes to show just how over valued housing is.

By the way, Silver is the better buy in my opinion, gold is not cheap compared to other things in historical terms while silver is still cheap. Gold however compared to currencies is another matter, measuring gold value against a paper currency is like using a rubber band measuring tape.

I conclude that Mr Worthington’s article was very useful for wrapping up fish & chips, and like all paper has returned to its intrinsic value

Bye for now.

1 Comentário:

Anonymous said...

Rob from Canada, Please! Read and understand what is going on in the world of paper money and buy silver or gold NOW!!! This is not a joke!!!
Tanks Andy for your time producing quality info in a world of escalating disorder. Only a FOOL would disregard what articles are on this site so, please tell us "FOOLS" how to prepare for the FUTURE...

GB,
Rob.

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