He Who Holds The Gold

Governments all over the world have resorted to FIAT currencies that are no longer tied to the value of a hard asset. The word FIAT comes from Latin and simply means “by decree”. The fact is, both gold and silver have been money for centuries. It’s only in the last 50 years that the US stopped using Gold and Silver as the basis for money. For a while, it was illegal for US citizens to hold gold. There was a shortage of gold to fund the war effort around the second world war and the US government didn’t want to be competing with private citizens for access to gold reserves.

Fortunately that ban was lifted and we can all buy gold coins or bullion.

So what is gold worth today?

It’s a little like asking how fast you’re going? It all depends on your point of reference. You might be standing perfectly still right now. But the earth is spinning on its axis and if you were standing on the equator, you would be traveling at a speed of roughly 1,000 miles per hour.

But wait, the planet itself is rotating around the sun once a year. Maybe you’re really traveling at a much faster rate of 30 km per second or about 67,000 miles per hour.

You get the idea.

So what is the value of gold? It depends on your point of reference. Is the measure of value in US dollars, in Euros, in Chinese Remnimbi?

Maybe when the price of gold is going up, it’s really the value of the currency that is going down. Perhaps you should be measuring your net worth not in dollars, but in ounces of gold?

Why is it that both China and Russia are amassing gold at furious rate? In fact, China is growing its gold reserves at a rate that is equivalent to the annual global mining volume. Whatever gold is being pulled out of the ground today, China is buying virtually all of it.

I know of a few contractors who have been working in the oil field in Saudi Arabia. They get their pay check in gold bars.

So today the price of gold, as measured in US dollars has gone up by nearly 20% in just the past couple of months. Is that a reflection of the weakening of the global economies and an anticipation that governments will start printing more money again as the economies show signs of weakness?

So why does the price of gold as measured in US dollars fluctuate so wildly? Should the price of gold not be more stable?

In the end, gold is a hard asset with intrinsic value. It’s value should be very stable over time. It’s one of those references. So are other hard assets. That 11 unit apartment building we built last year will not change in value from week to week based on whether the President sent a controversial message on twitter or not.

It’s still the same 11 unit building where a two bedroom apartment rents for $1,650 per month. It will be worth about the same in a year, plus a little bit of appraised value growth as our currency devalues. The rents will increase a bit, so will the expenses. In 10 years, it will still be the same 11 unit building, generating strong income and cash flow each and every month.

We tend to think of our net worth in dollars. But what if we thought of our net worth in apartments, or in ounces of gold? What if we measured our net worth in acres of agricultural land, or number of beds of dementia care in assisted living? Each one of these offers a hard intrinsic value based on the underlying physical assets and value to the marketplace.

The benefit of holding a hard asset is that devaluation of the currency has three effects. It wipes out purchasing power for those on fixed income. It wipes out savings, and it wipes out debt.

You don’t typically borrow money at low interest rates to buy gold, although I suppose you could. It wouldn’t be terribly responsible because gold doesn’t generate positive cash flow.  But real estate can carry the debt service plus a bit and provides a highly effecting hedge on inflation.