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Why Hold Gold?

In response to one of the posts on Gold yesterday, a reader sent an email directly to me that others might find of interest:

I read with interest your column today on Gold.  I have GLD, but no physical gold.  I have a lot of Apple shares, which have grown enormously, but I fully agree with your analysis and don’t see Apple selling a lot of consumer products when the stuff hits the fan.
My question is related to this sentence from your post.
“When this finally ends the big winners are apt to be the ones who have lost the least purchasing power. Keeping score in nominal dollars is likely to be meaningless. Gold tends to hold its purchasing power regardless of what happens to fiat currency.”
How do you achieve “purchasing power” when we reach this stage, with physical gold?  How do I buy the things I need with gold coins?  Do I get change?  I am struggling with how Gold will do in the barter system that I assume develops when the dollars are worthless.

My Response:

Gold will not be of much value in for bartering purposes, at least not for typical small exchanges. View gold as a store of wealth rather than a barter item. You hold it to protect the purchasing power of your current wealth when the currency is threatened.
A currency collapse threatens dollar-denominated wealth. If one occurs (and I believe it is likely), gold should hold its purchasing power just as it has for a few thousand years.
During such a crisis, it is likely that the dollar (or other fiat currencies) will be shunned because its value rapidly declines. Barter is terribly inefficient, although at some point it becomes more efficient than attempting to protect against the deteriorating currency. Gold could be used in such a world, although it is rather impractical because of its high value and indivisibility. Silver would be more useful because of its lower value per ounce.
Better still would be items like food, water, ammunition, gasoline, liquor, soap, medicine, toilet paper, etc. etc. Necessities like these will always be in demand and can easily be used in barter. There is indication that one product may already be on its way to bartering fame.
How long such a crisis lasts is not determinable. It will last until a new, trusted currency appears. That might take months or years. My guess is that regional currencies may develop as substitutes to the dollar. How well they are managed will determine if/when people begin to use them. Trust once lost is hard to regain.
Gold is pretty and constrains politicians when it is a barrier to money creation. Once the US closed the gold window in 1971 gold ceased to play any role in the monetary system and no longer constrained anyone.
Gold tends to hold its purchasing power as demonstrated throughout history. That is the reason why gold interests me. Ten years ago, I never looked at gold. I regularly wish that I never had to. I would rather have money in productive assets earning income. I would rather live in an economy where prices weren’t distorted by monetary cranks.
Conventional investments are too risky in a dying economy, especially one subject to huge currency risk. Tangible assets mitigate the currency risk.
For me, gold is nothing more than an escape from dollar deterioration and economic collapse. I wish economic life could return to the stable times of old. Sadly, I will never see those days again as many of you may not either.
While the threats are real and serious, they are not unlike the income security problem that mankind has always wrestled with. The current problem is just another variant of the classic portfolio problem. Limited assets must be spread among competing uses. Primary consideration must be given to life-sustaining needs (minimum consumption requirements). Secondary considerations go toward preparing for the future (i.e., a savings/investment program designed to create wealth for unknown contingencies and retirement).
To the extent the minimum consumption requirements are satisfied with something left over, there is a secondary decision as to how much of the excess to spend now versus spend later. Specifically, how much does one increase his current standard of living versus defer such excess to future periods in the form of savings/investment?
In normal times, these are the decisions prudent individuals face. In troubled times the same decision must be made although the problem is made more difficult as the means of achieving various objectives may be more limited.
Gold should be looked at as a store of wealth. But so should other tangible assets.

5 thoughts on “Why Hold Gold?”

  1. Pingback: price trends show that consumers value gasoline over silver, stocks, and currency « power of language blog: partnering with reality by JR Fibonacci

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  3. There is another reason to own gold. There is much talk of some new international currency based on gold being developed sometime in the next few years. China is currently amassing tons (literally) of gold, and is encouraging its citizens to do so. The speculation is that the yen will be unpegged from the dollar (which then becomes worthless) and become either a new currency entirely or one backed by gold.

    Do the best you can to hide your gold purchases as the gov’t will likely confiscate it during the fiscal/currency crisis.

    One more note on silver. Silver has numerous industrial uses, but in very low doses, hence it is not re-cycled and is actually consumed. The traditonal gold to silver ratio has been around 20:1 but it WAY off today. Should silver return to its historic norms, it will skyrocket in value.

  4. Perhaps some mention of the other alternative currency which already exists would be appropriate here though its use is not yet as widespread as purloined Tide. I refer of course to silver. Specifically, circulated 1964 or older US 90% silver coin. Short term more volatile than gold but much ore useful as a more efficient means of conducting retail transactions than gold.

    Can’t remember the source but it is germane nevertheless:
    Gold is the money of kings. Silver is the money of gentlemen. Copper is the money of peasants. And paper is the money of slaves.

  5. Gold can be used for barter or purchasing goods.The world’s first and only sound money system is here !Gold by the gram currency in a certified numbered format available now.No fees, premiums or other hidden cost acquiring Gold Bullion Currency.Company owns the gold mine,the refinery and the distribution system.Complete details can be found on our website.

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