News

Smart money looking to gold

By: Craig C. Le Bouef

Tue, 02 Feb 2010 0:33:55 CST

History

Gold has served as money throughout most of recorded history. Gold was first coined about 2,500 years ago and was and has been used by all the great civilizations at one time or another. Greece and Rome used gold as money and the industrial revolutions of Britain and America were based on the gold foundation in which money could be converted to gold.

During the Roosevelt Administration of the 1930s, it became illegal for U.S. citizens to conduct private monetary transactions in gold. The role of gold then became limited to official government transactions with foreign governments and central banks. In 1971, under President Nixon, the last official link between gold and the U.S. dollar was terminated and since then, all of the world's major currencies have been purely paper. Meaning, that currencies trade against each other and are backed by nothing (also called "fiat" currencies).

The switch from currencies based on gold (or silver) to currencies based on other currencies was a landmark in the history of money. Although it is taken for granted, it is important to remember that 38 years is a short time in the long history of civilizations. As one noted economist put it, "a world system has emerged that has no historical precedent "» the ultimate consequences of this development are shrouded in uncertainty."

Commodity and investment

Gold appears to be one of the few investments that have done well in the past 10 years. While equities, real estate, and other commodities have experienced major swings, the gold price has increased more than 300 percent since 2001. In fact, the price reached $1,200 an ounce in December 2009.

Investor interest in gold is higher now than any time since the 1970s. Obviously, some investors are chasing a hot investment. Others are disillusioned with stocks and other asset classes. And others are concerned about the significant amount of paper money that is being printed by central banks.

Gold is no ordinary commodity. It is money, and throughout history it has served as a store of value and as a safe haven during uncertain economic times. Gold is produced not only for consumption but also for accumulation. In 2008, the top gold-producing countries were China, followed by the U.S. then South Africa. As of September 2009, the largest gold reserves were held by the U.S., followed by Germany, then The International Monetary Fund.

Recently, a main factor in the rise of investment demand for gold is the concern over the global financial system and the potential consequences of the fiscal and monetary policies of world governments and central banks. In 2008, during the worst financial crisis since the Great Depression, interest in gold as a safe haven increased significantly. Gold is also attracting speculators trying to make quick money in a hot commodity.

Purchasing power

During the long run, the most important characteristic of gold has been a store of wealth. Generally, when confidence in currencies has decreased, the price of gold has increased.

The financial history of the world tells us that the purchasing power of currencies erodes over time. Whereas, the purchasing power of gold has remained relatively constant.

This is evident in the history of the U.S. On April 2, 1792, Congress established the dollar as the nation's monetary unit. Since the 1930s, the dollar has lost about 96 percent of its purchasing power as compared with 1792 when it was created.

The U.S government is running large budget deficits and politicians will face continued pressure to borrow massive amounts of money to finance Social Security, Medicare, and other programs. In the past, foreign investors — especially the Chinese — were the underwriters of our debt. History has taught us that the main reason to own gold is to not make money necessarily but to have money.