One investment is touted as the cure all for incompetent governmental economic mismanagement, heightened risks of war, threats of rampant inflation, and depreciating currency. That investment is making new highs every day. That investment is gold. Should you succumb? No, and here are six reasons why! Words: 1269

So says the David G. Dietze (www.ptview.com ) in a recent article* which Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, has reformatted into edited [...] excerpts below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Dietze goes on to say:

1. You Don’t Know How To Value It!
Is gold worth $500 or $3000 an ounce? Truth is, no one really knows. Most investments generate an income stream that can be measured as a percentage of cost. That percentage can be compared to other investments like Treasury bonds or considered as compensation for deferring use of your principal. People intuitively can understand spending $100 today versus waiting a year in order to enjoy $110. Unfortunately, gold produces no earnings or income.

Gold has no intrinsic value. You can’t eat, drink it, smoke it, or drive it. Its value is strictly based on perceived value by another – and that has proven very volatile over the years.

Oh sure, there have been attempts to put a value on gold. Some argue that an ounce is always equal to the price of a quality man’s suit. Some point to the average ratio of the price of gold to the level of the S&P 500 index as being 1.74 since 1980, therefore justifying a price of nearly $2,000.

Others target a price of nearly $2,287 by taking the all time high for the metal in 1980, $850 an ounce, and adjusting it for ensuing inflation. The math is clear, but whether the $850 price back then made any sense is another matter, as it lasted just briefly among panicky concerns about inflation, energy prices, and a Soviet invasion of Afghanistan.

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On the other hand, some support for the price does come from the cost of production. That reportedly averages $556 per ounce. If gold were to decline toward that price, production would diminish, helping prop prices up but, if gold keeps climbing, that will spur production as previously unprofitable mines become profitable. The added production would tend to brake further price rises.

2. All The Gold That’s Ever Been Mined Sits as Inventory For Potential Resale
There is little in the way of actual use for gold; it does not get used up. While jewelry has historically been a use, it has been declining in importance since the 1990s as economies have soured and the price of gold has soared. In any event, much of the jewelry around the world is considered an economic asset, and could be traded or melted down at the right price and circumstances.

The bottom line is that nearly all the gold that’s been mined since the beginning of time remains and is potentially available for resale. That inventory is always increasing. As they say, gold is a commodity that’s extracted from one big hole in the ground, called a mine, and then redeposited in another big hole in the ground, called a vault. That supply overhang makes investing in gold quite risky.

The 1970s saw a huge run up in gold’s price. But, during the following two decades, it lost 80% of its value on an inflation adjusted basis. That potential still exists today.

3. You Don’t Know What Economic Conditions Lie Ahead and How They Will Affect Gold Demand
Gold is seen as a hedge against inflation and a weak U.S. dollar. The problem is, forecasting inflation is very tricky. Those who complain loudest about inflation argue that the Government’s fiscal policy has been too profligate and monetary policy too easy. For instance, the Federal Reserve recently suggested it would engage in further monetary easing should economic conditions deteriorate.

Betting on what policy makers will actually do is very difficult. They don’t want to see inflation or gold prices materially higher. The inevitable policy change to higher interest rates and higher taxes will dampen inflation potential and could cripple gold.

Next time you’re tempted to bet the farm on gold based on your economic forecast, heed Warren Buffett’s admonition that God put economists on the earth to make astrologers look respectable! Some of the same economists warning so vociferously today gave us no warning three years ago.

The bottom line is we know gold is trading at sharply elevated prices today. What we can’t be sure of is whether the dire economic forecasts driving that rise will materialize.

4. Even if it Makes Sense in the Long Term, Gold is Overbought Today
With the price of gold having tripled since 2004 and indeed having nearly doubled just since 2008, gold is on an unsustainable “J” curve. No amount of inflation or jewelry demand can justify its continuing up indefinitely.

The rise in gold is due to speculative demand, and can reverse itself quite quickly. The charts are reminiscent of the Internet bubble of the 1990s. Sure, gold may rise slowly to reflect inflation and gradual increases in extraction costs. However, the recent speculative demand is not sustainable, and carries grave risks.

Sentiment seems overdone, too. Television now regularly carries commercials offering gold. Numerous scams are being reported as unsophisticated investors rush to get involved. Gold is being touted as the cure all for whatever ails the economy. History proves over and over that when sentiment surges in a certain direction, a correction is often at hand.

5. Gold is Taxed Unfavorably
One of the attractions of stock investing [in the U.S.] is that long term Federal capital gains rates are capped at 15%. Unfortunately, gold does not receive similar favorable treatment. Gold is treated as a collectible, subject to a higher maximum tax rate of 28%. Investors do not escape the higher rate when they buy gold via gold bullion holding exchange traded funds (ETFs).

If you’re determined to invest in gold but wish to avoid those higher rates, consider gold mining company stocks. While they entail a panoply of risks that go beyond the yellow metal itself, at least your tax bill on long term gains will be less.

Another strategy is to invest using your IRA. Although collectibles like actual gold or gold coins are not permitted in IRAs, gold owning ETFs are considered acceptable. Gains in an IRA are not subject to tax until withdrawn.

6. Gold Produces No Income
Gold, like cash, pays no dividends or interest. That alone should make it suspect for those seeking income. What’s worse is that there is an opportunity cost for holding gold, namely, the foregone interest you would otherwise have generated from an alternative investment.

To make matters worse, proper safekeeping involves storage costs including insurance. Those costs are not avoided by buying gold via an ETF as the ETFs assess an ongoing fee, generally in the range of 0.4% annually, for those and other expenses.

In sum, gold at its current price is very hard to justify.

*http://www.gurufocus.com/news.php?id=108227 (David G. Dietze, JD, CFA, CFPTM is President and Chief Investment Strategist of Point View Financial Services, Inc. in Summit, NJ. He can be reached at firm@ptview.com)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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Analysts, financial planners and so called “experts” tout a variety of anti-inflation investments but none have the intrinsic value of gold, silver or any other precious metals. Words: 598

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below further reformatted and edited [..] excerpts from Aurum Advisors’ (www.goldcoinsgain.com) original article* for the sake of clarity and brevity to ensure a fast and easy read. They go on to say:

Intrinsic Means Forever
Intrinsic value does not mean that the product may have value for some time, or even for a long time. Instead, intrinsic value denotes value forever, i.e. a value that remains relatively unchanged and equal to the same amount today as it was thousands of years ago.

Gold and silver are some of the few products with intrinsic value (excluding food and shelter) because they’ve been demanded for thousands of years. In addition, they still purchase the same goods today as they would in ancient times. The best example is that of the custom suit, which can be purchased today for $1200 (the price of an ounce of gold) or so, just as it could during the 1940s and ancient times for an ounce of gold.

Anti-Inflation Investments Must Have Intrinsic Value
In order to be a truly anti-inflation instrument, the investment itself must have intrinsic value. Gold and silver have each produced returns that compare to inflation, making them suitable as safeguards…while other commodities like oil, coal, coffee, and pork bellies may rise and fall with inflation, they have no intrinsic value – which means they have no place as a long term hedge against inflation.

Paper Inflation-Protected Products
Frequently, some of the most “practical” anti-inflation investments are also the [greatest] shams in the investing world. True, inflation-protected securities require no storage space and can be bought and sold on a dime, but how does this translate into intrinsic value?

Treasury Inflation-Protected Securities (TIPS) [or Real Return Bonds (RRB) as they are referred to in Canada] are one of the more popular products for inflation protection. TIPS[/RRB] are unlike other government debt; they are indexed to inflation to always provide a return that is greater than inflation. However, the proof is in the pudding. TIPS[/RRB] are indexed to the change in inflation based on the Consumer Price Index, which almost always lags true inflation of the money supply. In addition, TIPS[/RRB] rely on counterparty risk and are only as good as the agency backing them, which is the US government. TIPS[/RRB] lack any intrinsic value, as more of them can be created just by printing!

The ‘Real’ Value
When it comes to safety and security, no other instrument compares to real physical gold or silver. History suggests that gold and silver have always accurately reflected the change in inflation and protected investor’s wealth against poor economic conditions. In addition, unlike empty promises and inflation-protected notes, gold and silver coins are tangible and can be held in your hand.

In today’s economic world, [what] you need [is] an investment with intrinsic value, i.e., gold or silver.

*http://www.goldcoinsgain.com/page750.html?mode=preview

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

“If you’re holding paper currency, you have to have some kind of trust that the country that issued it is not just going to print its way out of its problems. That’s a real concern right now. Gold, on the other hand, has real intrinsic value, unlike a paper currency which can be debased by its government.” – Sacha Tihanyi, currency strategist, Scotia Capital; Words: 2233

In further edited excerpts from the original article* Nick Barisheff (www.bmgbullion.com) goes on to say:

Currency versus Money
Most investors confuse money and currency, but they are not the same thing.

a) Money is defined as a medium of exchange, a unit of account and a store of value. For centuries, money referred to coins made of rare metals (gold and silver) with intrinsic value, and to notes backed by precious metals.

b) Currency, while it is a medium of exchange, is not a store of value. It only derives its value by arbitrary fiat government decree and hence the term “fiat currency”. Paper banknotes represent money but they are not money. They are simply promissory notes whose long-term “value” or purchasing power depends entirely on the fiscal and monetary discipline of the government that issued them.

Therein lies the problem. In an era of massive fiat currency expansion by profligate governments across the globe, today’s currencies are depreciating in value faster than yesterday’s news. Fortunately for precious metals investors, gold and precious metals have risen in value, and will continue to rise in value against all currencies because they have once again resumed their historical role as stores of value: money.

“When the price of gold moves, gold’s price isn’t moving; rather it is the value of the currencies in which it’s priced that is changing.” – John Tamny, economist, H.C. Wainwright Economics

The Decline of the World’s Currencies
Currency debasement isn’t a recent phenomenon. For decades, governments around the world, through their central banks, have been creating money out of thin air to cover their excessive spending and mounting debt. Investors have for the most part accepted this subtle form of taxation, because it seemed to have little personal impact. However, appearances are deceiving. Investors are discovering that the value of their dollar-denominated assets has actually declined a staggering 82 percent since 1971!

The Wrong Measuring Stick
Every day, the media (via currency traders) informs Canadian investors about the latest price of the Canadian dollar in US dollar terms, while US investors compare the US dollar to a basket of the world’s major currencies [the U.S. Dollar Index]. This information, however, gives investors surprisingly little insight into the true value of their portfolios. If we started measuring the world’s currencies against money (i.e., gold), investors would be horrified at the stark decline in the value of all currencies. Most investors’ portfolios are heavily weighted towards currency-denominated financial assets (stocks and bonds), but few realize that the true value or purchasing power of their portfolios is declining every single year because of currency depreciation.

The Rate of Currency Decline is Accelerating
Since 1913 (the year the US Federal Reserve was established), the US dollar has lost over 95 percent of its value of which 82 percent of its value has been just since since 1971 so the rate of currency decline is accelerating.

In the past ten years alone, the US dollar, the Canadian dollar, the UK pound and the euro have collectively fallen 70 percent in value if measured in real (currency-debased) terms. In other words, when they are priced in terms of gold.

The (Fiat Currency) Money Supply
Not too long ago, all the world’s major currencies were backed by gold because it was a universally recognized store of value. The gold standard imposed fiscal and monetary discipline, since each country had to hold enough gold to equal the amount of money in circulation however that is not the case any longer. Government spending around the world is exploding, and (fiat currency) money supply, along with government debt in the world’s major economies, is exploding along with it. Nowhere in the world has spending become more out of control than the US where the monetary response to last year’s financial crisis is creating yet another bubble, and this time it will be the bubble to end all bubbles.

Countries are Increasingly at Risk of Sovereign Debt Default
“In the process of saving a few ‘too big to fail’ corporations and their bond holders, policymakers are greatly increasing the risk of sovereign defaults.” – Puru Saxena, editor/publisher, Money Matters

The risk of massive and widespread sovereign debt default has never been higher. “Official” US government debt has soared to 90 percent of GDP, while multi-trillion-dollar budget deficits for the next several years will send that number soaring. Japan, the world’s second-largest economy, was recently put on credit watch. Its debt is twice total GDP, yet its newly elected government has announced much higher spending for 2010. The UK’s 2009 budget deficit will be over 14 percent of GDP, adding to a net debt that will reach 56 percent of GDP this year, 65 percent in 2010 and 78 percent by 2015.

Spain, Italy and Portugal are facing major fiscal deficits, as is Eastern Europe. Dubai is billions in debt and its prize jewel, Dubai World, is bankrupt. Greece’s credit rating has been slashed, and its debt is forecast to reach 130 percent of GDP. Then there is Iceland, whose debt had exploded to seven times GDP before the global meltdown. The country’s banking system has now collapsed, its currency is deeply devalued, its real estate market has imploded and the country is in a full-blown economic depression.

The Incredible Shrinking Dollar
As the world’s reserve currency, the US dollar is a proxy for the rest of the world’s currencies. The dollar’s decline is a direct reflection of America’s deepening financial troubles, exacerbated by a ravaged banking system that, by 2010, may see over one thousand banks insolvent. In 2009, the US incurred a budget deficit of $1.4 trillion, and its debt rose by $1.9 trillion due to off-budget expenditures. These off-budget expenditures alone were more than the 2008 budget deficit. At the end of 2009, America’s total debt was over 100 percent of GDP.

In their attempt to reflate the bubble-driven economy, President Barack Obama, Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner have decided to add to this financial house of cards. Instead of raising taxes or cutting expenditures, they have decided to borrow their way out of the problem and have the Fed create money out of thin air, which will almost certainly create another bubble. This bubble will make the others pale by comparison and will help destroy the US dollar. The dollar may be the world’s reserve currency, but China and other countries are not only questioning its status, but also actively campaigning for greater use of alternative currencies.

Gold Bullion Holding Strong
Where are most investors putting their cash? It should no longer be in stocks. Key stock indices like the Dow Jones Industrial Average have been flat to negative in nominal terms since the end of the last century but if the Dow is priced in gold (in other words, money) as opposed to depreciating dollars (in other words, fiat currency), its decline is far more dramatic. The Dow:Gold Ratio is not only in a downtrend, the downtrend is steepening which is a continuing indicator to move from equities to bullion.

Global creditors who currently hold trillions of dollars’ worth of dollar-denominated financial assets are dumping them to preserve their wealth. That is why gold bullion, along with its precious metals cousins, silver and platinum bullion, have been consistently keeping their value against financial assets.

Central Banks are Buying Gold Bullion
“We have a market-friendly Fed injecting a lot of liquidity in the system which will set us up for another bubble economy. Excessive monetary accommodation just takes us from bubble to bubble to bubble.” – Stephen Roach, chief economist, Morgan Stanley

India recently bought 200 metric tonnes of gold bullion from the International Monetary Fund for $6.7 billion. Russia has recently added 120 tonnes of bullion to its reserves, while China has steadily (and surreptitiously) increased its gold bullion reserves from 600 tonnes in 2003 to 1,054 tonnes today. China is even urging its people to put five percent of their savings into gold and silver because it is so worried about the dollar. Because trillions of dollars of its reserves remain in US dollar-denominated assets, China’s central bank will be diversifying into gold for many years to come.

The world’s central banks know that gold is primarily a monetary asset, not a commodity. That’s why a growing number of them are quietly diversifying out of US dollars and adding to their 29,000 tonnes of gold reserves.

In its 2010 Precious Metals Outlook, Scotiabank noted that “seeing the value of the dollar steadily erode must be a nightmare for large US creditors such as China, Japan, South Korea, Russia, the oil producing countries and Sovereign Wealth Funds (SWF)…

Major Investors are Diversifying into Gold
“Both China and America are addressing bubbles by creating more bubbles and we’re just taking advantage of that.” – Lou Jiwei, Chairman, China Investment Corporation

It is not just governments that are dumping dollars for bullion:
- A rapidly growing number of sovereign wealth funds (including China Investment Corporation) are participating, as are major institutional investors.
- Hedge fund manager John Paulson, who made $3 billion in 2008 by shorting subprime mortgages, recently took a multi-billion-dollar position in gold as a hedge against inflation.
- Northwestern Mutual Life Co.’s CEO Edward Zore said his company purchased $400 million in gold (the first time in its 152-year history) because “the downside risk is limited, but the upside is large. We have stocks in our portfolio that lost 95 percent. Gold is not going down to $90.”
- Hedge fund manager David Einhorn, through his Greenlight Capital fund, has sold gold ETFs in order to invest in longer-term and lower-risk gold bullion because of current US economic policy.
- Lone Pine Capital significantly increased its stake in gold this year.

Perhaps of even greater interest to the unwary investor is a survey of US hedge fund managers by London-based Moonraker Fund Management: 90 percent (20 of the 22) of the hedge fund managers surveyed admitted they had bought physical gold for personal investment. These sophisticated investors know something that the average investor doesn’t: that the global policy response to the financial crisis will not only devalue the world’s major currencies, it will decimate the US dollar.

Many Investors Still View Gold as a Commodity
Individual investors are not so farsighted – yet. Because most of them have only experienced one kind of market – a 25-year bull market in stocks – many still think gold is just a commodity like copper, zinc or pork bellies. Gold is far more than that, however. It has a 3,000 year history as money. For much of that time, it was the universal medium of exchange because of its divisibility, portability, rarity, beauty, malleability and indestructibility. Despite today’s negative sentiment, gold is not a speculation or a barbaric relic. Gold is money. Gold retains its purchasing power year after year.

Forty years ago it took 66 ounces of gold to buy a compact car. Today it takes only 14 ounces. If you had put your money in gold instead of dollars, the same car would actually be 79 percent cheaper, because gold keeps its value. Houses, stocks and virtually every other asset on earth would also be cheaper if bought with physical gold.

The more investors learn about bullion, the better for their portfolios If you are already a bullion investor, now is the time to add to your portfolio. If you are new to investing in bullion, now is the time to start dollar-cost-averaging into bullion. I encourage investors to learn as much as they can about bullion and about the markets in general. A good place to begin is the Learning Centre section of our website (www.bmgbullion.com). It offers a comprehensive look at the economy, money, markets and bullion investing, and provides a variety of thought-provoking articles written by experts in the field of gold and precious metals.

Gold is Money
Gold is money because it cannot be created out of thin air by government decree. Unlike bonds, gold does not represent someone else’s liability and, unlike stocks, gold does not rely on someone else’s promise of performance. Gold is money because, unlike currencies, impatient monetary policymakers cannot change its value. The rising gold prices we have experienced for the last eight years do not signal a bull market in precious metals, but rather a vote of decreasing confidence in the future value of paper currencies.

Currency-denominated financial assets are a disaster waiting to happen. The current economic rebound is a mirage, being entirely dependent on something artificial and unsustainable: massive government spending. A new crisis is building out of unprecedented fiscal and monetary mismanagement. Fortunately, smart investors can protect their wealth from the coming storm. The true level of risk has not been priced into the markets.

The time to shelter your wealth from the storm is now. There is no safer investment on earth than bullion, because bullion is and always will be money.

*http://www.bullionbullscanada.com/index.php?option=com_myblog&show=gold-is-money-unlike-the-world-s-currencies-gold-retains-its-value.html&Itemid=116

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.