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Weekend reading: Why hold gold?

Weekend reading

This week’s best post, then some other good reads from the Web.

There is never a time when the inflation question doesn’t hang in the air like a speech bubble above the head of Charlie Brown.

But you’d have to go back to the 1980s to find a time when it was such a consistent theme in economic and business discussion, and to the 1970s to find it being talked about so regularly around the dinner table1.

With deflation run out of town via quantitative easing, fears of inflation hold the floor. And this particular combination – inflation plus indebted governments spending money they don’t have – has been the perfect backdrop for the latest 18-month run in the decade-long gold rally.

As the post of the week, from Simple Living in Suffolk, explains:

That’s one of the beauties of gold – it has value because of what it is, not what it represents or who issued it. Time and bad government policy gnaw at the value of that twenty pound note over time, but like the Fallen, time does not age gold, nor does it turn to rust.

It is one of the last atavistic race-memories of a time when the value of currency was inherent, not symbolic, a throwback to barbarous times, of swapping animals and goods and even human beings.

The author, ermine, thinks he’s got his gold allocation wrong, and since he wants to someday barter it for ethanol, dog food, and a few feral goats come the meltdown, I’m inclined to agree.

No dusty barter-town trading post is going to swap your gold ETF for a slave girl and half a dozen kumquats in the post-ATM era. It will be shiny metal teeth and wedding rings all the way.

Of course, while I love ermine’s historical and personal perspectives, I’m not half so gloomy about the outlook myself. Provided I see some daylight in any 48 hour period, I see gold for the bauble it is.

I also happen to believe that – contrary to what the gold bugs believe – it’s the pointlessness of gold that has allowed it to become so valuable, not its incredible virtues.

When gold really was important, the US government banned private ownership of it. Now Tesco will trade your gold. Every little helps (the gold price).

Then again, I’m only human and maybe a little barbarous at heart, so I can’t help wishing I owned a Krugerrand or two. I also note that the Chinese and the Indians are still mad for the stuff.

There’s more of them than us, which is the best reason to buy gold of all.

The best of the rest of the blogs

From the mainstream media

  • Phds: Not worth the money and effort Vs Masters – The Economist
  • Young Americans: Fatter waists, thinner prospects – The Economist
  • Why the government can’t stop bank bonuses – Peston/BBC
  • Record 0% credit card terms [but watch fees] FT
  • Merryn tots up her usual bearish litany – FT
  • John Lee’s end-of-year portfolio results – FT
  • Self-assessment tax deadlines for 2011 – Telegraph
  • More UK tax scrutiny to come – Independent
  • The case for Russia and Eastern Europe – Independent
  • 5 green ways to save money – Independent
  • Self-build a home for £150,000 – Guardian

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  1. Not least because families don’t eat around the dinner table anymore! []
{ 9 comments… add one }
  • 1 Henry January 9, 2011, 11:27 am

    Even if society were to collapse, it wouldn’t be gold that takes over from money, it’ll be tins of beans, cigarettes, chocolate and shotgun cartridges. Gold will be seen as just the shiny piece of metal it is. People who buy gold because it will keep them fed after the End Of The World are fooling themselves.

    Look at past collapses or hard times – the end of Rome, hyperinflation in Germany, the Depression, World War II – or even the economics at work inside a prison. I can’t think of a single example of a post-money economy where a stockpile of gold was worth more than a stockpile of food.

  • 2 Salis Grano January 9, 2011, 5:03 pm

    @Henry. Yes and no. There are degrees and kinds of apocalypse. Gold is most useful in situations where there is a national/regional destruction of money, like Weimar, less so for global catastrophes. Most gold fanciers just want it as a small part of their holdings anyway.
    .-= Salis Grano on: Annual Roundup 31-12-10 =-.

  • 3 Henry January 9, 2011, 5:57 pm

    @Salis Grano. My German maternal grandparents lived through Weimar. My mother told me of a time when my grandfather swapped a gold coin for six eggs. Still, six eggs is better than no eggs, granted. Had he spent the equivalent sum on cigarettes instead of gold before the crisis he would have got far more than six eggs from the farmer though.

    I understand the other reasons for holding gold – hedging against inflation, etc. I just wanted to take issue with the idea that gold is a safe haven in a real (inter)national crisis.

  • 4 ermine January 9, 2011, 11:56 pm

    Gold is no great use in an acute crisis, you want the shotgun cartridges first, then maybe the tins of beans, though bear in mind that tinned food starts to blow after about five years. Wild food foraging and growing knowledge is far more useful. It is after that initial period that gold may have some use as a store of value and medium of interchange.

    Cigarettes may have less value nowadays as the addiction is less prevalent. Aspirins, coffee, tea and the like may be modern equivalents.
    .-= ermine on: The Gold Conundrum =-.

  • 5 twentysomethingmoney January 10, 2011, 7:46 am

    These are some great links, thanks for sharing!

  • 6 Bruce January 11, 2011, 7:47 am

    The 6 billion people in the world have a choice…hold their own currency, hold USD, hold the Euro, hold the JPY or hold gold. Right now the least worst to hold for most people on the planet is gold.

  • 7 The Investor January 12, 2011, 10:13 pm

    @twentysomethingmoney – Thanks for stopping by!

  • 8 The Investor January 12, 2011, 10:16 pm

    Interesting discussion. On cigarettes, I read the other day that smoking will be practically extinct in the Western World on current trends by 2050. (Norway will be the last to give up, apparently).

    It is interesting to ponder what might have barter value, without getting too macabre. Illicit or legal drugs? Penicillin? Condoms? Hypodermics? Water filters? Batteries? Particular parts for those mechanical cars still on the road that may be in short supply?

    But yes – sadly for the hippies who’ll be otherwise vindicated, shotguns probably come first. 🙁

  • 9 Macs January 15, 2011, 11:16 am

    “On cigarettes, I read the other day that smoking will be practically extinct in the Western World on current trends by 2050. (Norway will be the last to give up, apparently).”

    So come the new Dark Ages, we know what the Viking boats will be after when they come raiding…. “Cigarettes? Nah, mate. We’ve only got gold here, pop down the coast a bit, I hear they still have fags in Scunthorpe.”

    Makes you wonder what the berserker rage would be like, multiplied by nicotine withdrawal 🙂

    @Henry, I’d say you can never predict the nature of any future catastrophe, and an ‘end of the world’ portfolio needs diversification as much as a ‘business as usual’ portfolio. A bit of gold, some long-storage food, knowledge and skills for survival etc as ermine suggested. Rather than aspirins though, I grow feverfew and know a trick or two with willow bark 😉

    For all the ‘you can’t eat gold’ memes, I’d also add you can’t eat banknotes or share certificates, either. Or cigarettes – I saw a dog try that once, not pretty. Maybe in Weimar times a gold coin was only good for six eggs, but a few years later it was also good for keeping some Jewish families out of a fate even worse than starvation.

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