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Why Gold is not good for long term investment

Commodities / Gold and Silver 2011 Sep 18, 2011 - 03:53 PM GMT

By: Sam_Chee_Kong

Commodities

Best Financial Markets Analysis Article“Gold has no utility other than looking shiny and pretty. Gold demand equals fear demand and when people becomes more afraid than you in a year or two, then you will make money but if they are less afraid, then you will lose money. Gold by itself doesn’t produce anything and is a bad investment in the long run” Warren Buffet on Gold Investment


Gold is not an Investment as perceived by a lot of investors but rather it is an Insurance against bad times. As Warren Buffet said, the demand for gold is equal to fear demand. That means the demand of gold will be correlated to the level of uncertainty in the marketplace .The more uncertain the marketplace, the higher the demand for gold.

An intelligent investor during uncertain times, will add gold in his/her portfolio as part of its asset allocation. It will be a smart move to just allocate a small percentage of your portfolio, probably about 3-5% to gold. This is to ensure that, if there are any huge dislocations in currencies and economies, you will still be protected in one way or another. Why only allocate such a small percentage and not more? Why Gold is not a good investment?       

Firstly, gold price is highly manipulative, as demonstrated during the past decades. There is always a tendency for the fiat currency regime to suppress the price of gold whenever it possess a threat. Currently, we have two camps of people. One belonging to the fiat currency, while the other is pro gold standard. As such, there is a war going on between the fiat currency regime and the gold standard.

Unfortunately, those people that are calling the shots are the ones that are running the “fiat currency” regime. They will not hesitate to use any means available, either through the central bank, Presidential Orders and etc to suppress gold.

Contrary to popular belief, that The Federal Reserve is government owned because of the word FEDERAL. The Federal Reserve is actually a privately owned entity. It consists of 12 regional Reserve Banks and are mainly owned by the many member commercial banks. The Federal Reserve Bank of New York holds the largest percentage of shares (53%) in the Federal Reserve System.

The two largest shareholders of the New York Federal Reserve are JPMorgan Chase and Citigroup. JPMorgan and Citibank are the financial cornerstone of Morgan and Rockefeller empires. So, being the largest shareholders of New York Federal Reserve meant that, they are also the largest shareholders of the Federal Reserve System in the U.S, since NY Federal Reserve holds the largest share in the system.

 The cartel that owns the “fiat currency” also owns CME. So basically by owning the Federal Reserve, these cartels virtually have unlimited supply of “fiat money” at their disposal. The cartels are also known to be shareholders of Chicago Mercantile Exchange (CME), so there is a natural tendency for them to suppress the price of gold by using CME to hike the trading margins in gold.

Secondly, if the margin hikes by CME doesn’t work, the Federal Reserve through Bernanke will not hesitate to invoke a Paul Volcker 1981’s “shock and awe’. In 1981, the then Chairman of the Federal Reserve, Paul Volcker in his bid to end the effects of ravaging inflation (13.5% in 1981) from commodities and gold, raised the interest rate to 21.5% in 1981. At the same time foreign dollar holders are also dumping the dollar in protest over the foreign policies of the Carter administration.

As a result of the interest hike, it has officially ended the bull market for gold from the 1970s to 1981. Gold price went into a downward spiral for the next 20 years. The tripling of the interest rate, at the same time also forces global interest rates to go through the roof and triggering a global recession. By 1982, the dollar’s status as the world reserve currency was restored.  

Finally, during the last Great Depression in the 1930s, there were bank runs and shutdowns. Also, following England’s 1931 decision to remove the pound sterling from the gold standard, foreigners are turning to the US for gold. At that time, the Federal Reserve Note is 40% back by gold. The authorities know that that if everyone starts converting their dollar holding to gold then in no time there will be no gold left to back the currency. Hence, the money supply will collapse completely.

Something drastic needed to be done, to halt the alarming trend, on 5th April 1933, President Roosevelt confiscate the gold of Americans by changing the FRN, from a promise to pay in gold into legal tender itself, back by the full faith and credit of the United States. He debased the US dollar by 40% overnight, by raising the price of gold from $20.67 per troy ounce to $35.00 per troy ounce.

However, nobody can take advantage of this offer because people are not allowed to exchange their gold until 31st December 1974, where Americans can then buy, sell and hold gold. It is akin to having some shares in a company listed on the NYSE, that is  going to be suspended for the next 40 years and by the time it reopens in 2051, I don’t think many of us will be around.

Desperate time requires desperate measure and we will not be surprise if the Obama administration will again confiscate gold.  As you can see the odds of winning in this game in the long run is biased towards the cartels. As long as those in charge are pro “fiat currency”,  then gold price will always be suppressed and they can resort to any measures that they deemed right, even by using arm twisting tactics.

Nobel laureate Nouriel Roubini, after several false call for a market top when the price of gold touched US 830 and US 1300 twittered the following message, with emphasis added.

“SPAM  is a better hedge against inflation than gold : you can eat it and it can lasts 1000 years. Gold is as Keynes aptly said, a barbarous relic.”

Anyway for the sake of discussion,, as we know the price of gold futures precedes spot gold price. When everyone starts to scramble for physical gold, naturally all those who are holding paper gold futures will start dumping when they realize there will be no physical gold  delivery. This will lead to a collapse in the price of gold futures. Since spot gold price follows the price of gold futures, what will it be of spot gold prices?  Can anyone enlighten me on this, please?

by Sam Chee Kong

cheekongsam@yahoo.com

    © 2011 Copyright  Sam Chee Kong - All Rights Reserved

    Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Alan
18 Sep 11, 21:06
anti-gold

it would be good to read a QUALITY anti-gold article.


dincer
19 Sep 11, 05:11
gold mutterings

The author says "the price of gold futures precedes spot gold prices." Yes it is true but it is also true that the price determined in the FORWARD market precedes futures prices. And forward market is the main physical market where physical gold delivery contracts are traded. Most importantly, in a severe gold-scarce environment noone minds the spot or futures price. Physical gold is demanded at a very high premium over spot price. Backwardation will be the popular word in financial markets.

Secondly, today's financial conditions are much worse than 1980s. At the beginning of 1980s government debt/GDP ratio was 36%, today this ratio is close to 100%. In those old years credit market debt/GDP ratio was 150%, today it is 335%. Raising the real interest rates upto 5-6% costs $450-500 billions annually to US commercial banking and at least $150-200 billions annually to US government along with a totally collapsing housing sector, many bankrupt households and skyrocketing budget deficits (Never mind the other securities valuation losses!) This means outright bankruptcy for banksters.

Confiscation does not work cos American people do not own enough gold. Americans' possession is a tiny fraction compared to the rest of the world. In 1933 Roosevelt's executive order was targeted to establish a fiat currency regime and devalue the dollar, today we have already been in a fiat currency environment for 80 years and dollar is being devalued almost daily.


Abner Abrahem
19 Sep 11, 09:33
Gold Investment

Like all healthy bull markets, a good correction once in a while is needed to take the speculators out of the market. But don’t let a pull-back or correction in this long-running gold bull market deter you from looking at the glass as being half full, not half empty.

Regards,


Paul_B
19 Sep 11, 13:42
Buffet's views on gold???

Some investors just don't 'get' gold. They simply don't understand it and Buffet is one of those. He's a stocks guru - or has been in the past at any rate - and that's about all. Beginning any article about gold by quoting Buffet should inspire no confidence in the reader as to its validity.


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