Reason #1 to Keep Buying That Gold

Discussion of the Gold portion of the Permanent Portfolio

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Bean
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Re: Reason #1 to Keep Buying That Gold

Post by Bean » Tue Jul 09, 2013 6:08 pm

MediumTex wrote:
all human institutions are transitory

So yes, all currencies collapse sooner or later.  I just don't think that the collapse of the U.S. dollar is something to get too worked up about right now, but we all have 25% of our wealth in gold, so even if that were to occur we would be far more protected than most other investors, so it still doesn't seem like something that is worth getting worked up about.
Not suggesting the US currency collapse is imminent, just the probability is increasing at a rate that I not comfortable with.  Which is why the 25% allocation to gold drew me to the permanent portfolio.  It has strong logic behind its incorporation and soothes my crazy currency fears.
“Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.� ~Talmud
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Re: Reason #1 to Keep Buying That Gold

Post by AdamA » Tue Jul 09, 2013 6:14 pm

MediumTex wrote:
What do you think about the idea that since the early 1970s the U.S. has basically been on an "Oil and Guns" standard in which the U.S. military is used to keep world oil supplies flowing in exchange for oil producing states maintaining the petrodollar regime, which provides international structural support for the dollar?
Would you mind expanding on this a little bit.  It's an idea I've always found interesting, but haven't really been able to achieve anything more than a vague understanding of.
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Re: Reason #1 to Keep Buying That Gold

Post by goodasgold » Tue Jul 09, 2013 6:27 pm

Yes, all human institutions are transitory, but some are more transitory than others. Why rush things by means of the irresponsible policy of piling up debts to the point when they are unpayable?

The specter of America's future bankruptcy (unless we take drastic action to impede it) is not a hazy mirage in the distance. It is happening right now in places such as Detroit. According to an article in today's paper, some people in Detroit do not bother any more to call 911 when they need an ambulance. They know that saving a person's life depends on getting private transportation to the Emergency Room.
MediumTex wrote:

Why wouldn't the government just borrow more money (from itself, if necessary)?  That's what it's been doing for about 30 years now when it wanted to spend more than it took in through taxation.
I have the highest respect for you, MT (otherwise I wouldn't have invested in the PP.) But I have the impression, with regard to America's approaching financial crisis, that you may have been lulled into complacency by the financial snake oil being peddled by folks like Paul Krugman, who is one of "Moonbeam" Brown's chief adulators for allegedly "balancing" California's budget.

As for the government borrowing more money from itself, wasn't this tried as long ago as the American Revolution, with disastrous results? And what use is printing additional reams of money, with ever more zeros at the end of each number, if nobody will accept them? See:

http://www.google.com/search?gs_rn=19&g ... B573%3B297
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Re: Reason #1 to Keep Buying That Gold

Post by MediumTex » Tue Jul 09, 2013 6:46 pm

goodasgold wrote: Yes, all human institutions are transitory, but some are more transitory than others. Why rush things by means of the irresponsible policy of piling up debts to the point when they are unpayable?
What do you mean by unpayable?  We are talking about fiat currency here.  It's just an abstraction.  There is no limit to it, other than the limits imposed by inflation, but inflation is not a concern if private sector credit is contracting at the same rate that government debt is expanding.
The specter of America's future bankruptcy (unless we take drastic action to impede it) is not a hazy mirage in the distance. It is happening right now in places such as Detroit. According to an article in today's paper, some people in Detroit do not bother any more to call 911 when they need an ambulance. They know that saving a person's life depends on getting private transportation to the Emergency Room.
States or municipalities can easily go broke because they don't control the currency that their debts are denominated in.  The federal government is not under similar constraints.  If the federal government were under similar constraints I would completely agree with you.
MediumTex wrote: Why wouldn't the government just borrow more money (from itself, if necessary)?  That's what it's been doing for about 30 years now when it wanted to spend more than it took in through taxation.
I have the highest respect for you, MT (otherwise I wouldn't have invested in the PP.) But I have the impression, with regard to America's approaching financial crisis, that you may have been lulled into complacency by the financial snake oil being peddled by folks like Paul Krugman, who is one of "Moonbeam" Brown's chief adulators for allegedly "balancing" California's budget.
I can't speak to California's situation (other than my comment above about state finances), but when it comes to the federal government I don't know what approaching financial crisis you are talking about.  Wouldn't such a financial crisis (presumably related to public debt) be preceded by rising interest rates on treasuries, sort of like we saw in Greece a couple of years ago?  I just don't see anything like that happening at all right now.
As for the government borrowing more money from itself, wasn't this tried as long ago as the American Revolution, with disastrous results? And what use is printing additional reams of money, with ever more zeros at the end of each number, if nobody will accept them?
If nobody would accept them, you would be right, but they are accepting them, and when things get bad people run to the dollar, not away from it.

See what happened in 2008 when it looked like the world was ending.  The dollar shot up, not down.

Image
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Re: Reason #1 to Keep Buying That Gold

Post by goodasgold » Tue Jul 09, 2013 9:08 pm

MediumTex wrote:
What do you mean by unpayable?  We are talking about fiat currency here.  It's just an abstraction.  There is no limit to it, other than the limits imposed by inflation, but inflation is not a concern if private sector credit is contracting at the same rate that government debt is expanding....States or municipalities can easily go broke because they don't control the currency that their debts are denominated in.  The federal government is not under similar constraints.  If the federal government were under similar constraints I would completely agree with you.
...I can't speak to California's situation (other than my comment above about state finances), but when it comes to the federal government I don't know what approaching financial crisis you are talking about.  Wouldn't such a financial crisis (presumably related to public debt) be preceded by rising interest rates on treasuries, sort of like we saw in Greece a couple of years ago?  I just don't see anything like that happening at all right now.
As for the government borrowing more money from itself, wasn't this tried as long ago as the American Revolution, with disastrous results? And what use is printing additional reams of money, with ever more zeros at the end of each number, if nobody will accept them?
If nobody would accept them, you would be right, but they are accepting them, and when things get bad people run to the dollar, not away from it.

See what happened in 2008 when it looked like the world was ending.  The dollar shot up, not down.

Image
Once again, just because the world has prized U.S. dollars in the past does not mean they will necessarily accept them in the future. At one time the people of Zimbabwe were willing to accept Zim dollars, until the printing presses began running around the clock.

Once upon a time, the British were supremely confident that the pound would rule the world unchallenged. Look what happened. One possible scenario can be seen in recent developments in Australia, where the Aussie government has agreed to accept Chinese yuan as a medium of exchange instead of first converting transactions into U.S. dollars. Unless we change our ways, "Zimbabwe here we come." Enough said.
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Re: Reason #1 to Keep Buying That Gold

Post by Bean » Tue Jul 09, 2013 9:18 pm

With 25% of our portfolio in gold, I think we are good.  If I read my history correctly, in Weimar Germany you could buy a city block with 2 oz. of gold. 
“Let every man divide his money into three parts, and invest a third in land, a third in business and a third let him keep by him in reserve.� ~Talmud
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Re: Reason #1 to Keep Buying That Gold

Post by WildAboutHarry » Tue Jul 09, 2013 9:54 pm

The history of British coins in the 20th Century is interesting.

Prior to WWI, 92.5% silver (Sterling) 3p, 6p, shillings, florins, half-crowns, etc.

After 1919, 50% silver.

After WWII, no silver.

Kind of fiat in a metal-money product.
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Re: Reason #1 to Keep Buying That Gold

Post by MediumTex » Wed Jul 10, 2013 12:52 am

goodasgold wrote: Once again, just because the world has prized U.S. dollars in the past does not mean they will necessarily accept them in the future. At one time the people of Zimbabwe were willing to accept Zim dollars, until the printing presses began running around the clock.

Once upon a time, the British were supremely confident that the pound would rule the world unchallenged. Look what happened. One possible scenario can be seen in recent developments in Australia, where the Aussie government has agreed to accept Chinese yuan as a medium of exchange instead of first converting transactions into U.S. dollars. Unless we change our ways, "Zimbabwe here we come." Enough said.
How would you propose that we change our ways?

What is the U.S. doing that is so different from what the rest of the developed world is doing?

I once heard a smart person say that reserve currencies never collapse, they are "decommissioned."  This process will obviously occur with the U.S. dollar one day, but who knows when that will happen?  It could be ten years from now or a hundred years from now.  My point is that U.S. dollar collapse is not a sound investment thesis (IMHO) because so many other things may happen along the way before the dollar finally does collapse and I would hate to miss out on those other things while I patiently waited for the sky to fall.

That's the beauty of the PP--it allows you to profit from whatever the future may bring, including a currency crisis if that should come along in our investing careers.
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Re: Reason #1 to Keep Buying That Gold

Post by gizmo_rat » Wed Jul 10, 2013 4:42 am

WildAboutHarry wrote: The history of British coins in the 20th Century is interesting.

Prior to WWI, 92.5% silver (Sterling) 3p, 6p, shillings, florins, half-crowns, etc.

After 1919, 50% silver.

After WWII, no silver.

Kind of fiat in a metal-money product.
Yes it's a bit cheeky retaining the name Pound [of] Sterling, purchasing power has somewhat diminished over the centuries.
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Re: Reason #1 to Keep Buying That Gold

Post by goodasgold » Wed Jul 10, 2013 8:23 am

MediumTex wrote:
How would you propose that we change our ways?

What is the U.S. doing that is so different from what the rest of the developed world is doing?

I once heard a smart person say that reserve currencies never collapse, they are "decommissioned."  This process will obviously occur with the U.S. dollar one day, but who knows when that will happen?  It could be ten years from now or a hundred years from now.... That's the beauty of the PP--it allows you to profit from whatever the future may bring, including a currency crisis if that should come along in our investing careers.
We can begin by living within our means and beginning to pay off our towering debt to support our credit rating. Americans are responsible for our own debt, regardless of how other nations are behaving or misbehaving.

And I am skeptical of assertions that the national debt is an abstraction. On a personal basis, what would happen the next time our mortgage, car or college tuition payments are due, if we assured our creditors that the debt is a mere abstraction? Bad things would happen, just as will happen the first time the U.S. government is forced to default on its debt, as Detroit and Illinois are in the process of doing, and as California and other spendthrift states will be forced to do in the future.

As to the argument that the federal government can merely run the printing presses around the clock to pay our debt, the game is up when creditors finally conclude that the U.S. dollar, in terms of collapsing value, has joined the ranks of the Zimbabwe dollar or the Weimar deutschmark.

And I agree that the PP is a wise investment, but our profits will last only so long as an increasingly desperate government will allow us to keep them. We still have time to insist that the  government abjure its irresponsibility and get serious about retaining the confidence of the people willing to buy our funny money.
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Re: Reason #1 to Keep Buying That Gold

Post by tennpaga » Wed Jul 10, 2013 9:31 am

goodasgold wrote: And I am skeptical of assertions that the national debt is an abstraction. On a personal basis, what would happen the next time our mortgage, car or college tuition payments are due, if we assured our creditors that the debt is a mere abstraction? Bad things would happen, just as will happen the first time the U.S. government is forced to default on its debt, as Detroit and Illinois are in the process of doing, and as California and other spendthrift states will be forced to do in the future.
You are missing a key difference.

But you, the person with a mortgage, car, or tuition payment, are a currency USER.

As is the city of Detroit, and the states of Illinois and California.

In contrast, the Federal Government is a currency ISSUER.

They cannot be viewed through the same lens of expectations.
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* Gresham's corollary: Avoid participating in systems where good behavior cannot win.

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Re: Reason #1 to Keep Buying That Gold

Post by Pointedstick » Wed Jul 10, 2013 9:32 am

goodasgold, I think you're missing a couple of things:

1. A government that controls its own currency can never run out of money, only trust.
1a. Just because YOU don't trust the government, doesn't mean that the markets won't.
2. Historical hyperinflations have been primarily political phenomena, resulting from losing wars, destroying domestic productive capacity, and owing debts denominated in foreign currencies.

As MT so often brings up, the idea that the dollar is going to collapse in value and creditors are going to angrily demand a superior stronger currency ignores the reality of the world we live in today, which consists of powerful, economically advanced countries trying to devalue their currencies. If the dollar collapses, that would require a new world reserve currency. Who's gonna provide it? The Euro? I think not. The Yen? No way. The Yuan? I'm sure China would like that, but I don't see it happening.

Again, I'm not saying that none of your predictions will ever happen. But if they happen in 40 years, I don't want to spend that time worrying about collapse and losing out on investment performance. 40 years is a long time. By that point, my son will be reaching middle age!
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