Precious metals musings
With the current uproar going on in the world economy, I have been pondering the trend to invest in precious metals like gold and silver.
I suppose this type of investment only makes sense in the first place if one has savings languishing in a bank account somewhere, where the spectre of runaway inflation may threaten to diminish its value considerably in a relatively few years.
But, what I have wondered, is where does one attempt to draw the line on a fair price for precious metals? I think that currently there is quite a bit of hysteria leading people to buy gold and silver, and that possibly the prices being paid are creating yet another bubble in yet another market. What kind of a 'safe haven' is it when you pay 10x the monetary value that the precious metal would have had in a non-panic situation?
In Canada, it becomes annoyingly complex to figure out one's buying position in the precious metals given the uncertain future of the Canadian $ versus the US$. Like today for instance, the price of silver went up a bit in US$ but so did the Can$ versus the US$, so the net effect was that the price of silver decreased for a Canadian buyer. It must be nice to be an American where you never have to factor in the exchange in anything you do in the markets!
So the talk is that converting paper to gold or silver is a safe haven for individuals whenever the big inflation (if it comes) hits us. Yes, that sounds logical, but the trouble is, everyone knows this. So if the crunch were to come worldwide, how is gold and silver going to come back in style on a daily basis? Are you really going to work for a silver dollar a day? How much time has to elapse between the beginning of hyperinflation before ordinary people rationalize the value of their services in terms of metal?
If this adjustment time period is more than a growing season long, there will be hell to pay in food production. But that is a very short timespan!
We all have memories that will give us a rough approximation of what we think an ounce of gold should barter for, but the range of value could easily vary by a factor of....4...or 10....which is a heck of a lot. I can barely imagine the turmoil in trying to make gold and silver work again in a society that has revered US$ for so long.
Even the gold and silver nuts seem to be in a constant state of flux, converting their metals into US$ and then buying back into metals again to increase their holdings. But it seems like a game of musical chairs is being played. Ultimately, one is going to want to buy something with that metal, something big like a house, a machine tool or a business, and then the valuation is going to be tough to do. Most likely, the seller of the asset is going to take a beating on the deal, just so that the metal holder "makes sure" that he got sufficient overkill with the trade off of his precious metal to cover his butt in case the metal is not worth as much as anticipated.
If one buys precious metals and sits complacently on them, then that person is still imagining a future profit based on inflation of the value of the metal in terms of the next fiat currency to arise.
So if the world economy is going to crash, and the supposed precious metals are going to bring in the new world order (with he who has the biggest hoard becoming top dog), why don't we just do this voluntarily now? Repeg the US dollar (or some currency) to gold. Make something like gold grams the new currency of the world?
If one currency were repegged to a gold standard, this would kill gold trading in that currency stone dead, because of the equivalence of value. All other currencies would still trade gold because traders would still seek out the differential in value. I'm not dead certain that various currencies are really a good thing anymore. Maybe we should just have the one, that way, there will be less competitive advantage in constantly shifting the manufacturing base from nation to nation, creating artificial trade incentives based on 'my dollar is worth more than your dollar'.
However, a new gold standard would not solve the current sickness of debt in the world. We'd still have to agree on an international forgiveness formula, which, IMO, is the only solution to overindebtedness.
This is just a bunch of random thoughts to mull over. Please add what comments and thoughts you might have.
First you get good, then you get fast. Then grouchiness sets in.
(Note: The opinions expressed in this post are my own and are not necessarily those of CNCzone and its management)