A Child Understands Why Gold is Preferable to Paper Money By Patrick A. Heller, Market Update November 18, 2008
Last week, I was presented an insightful gift by a young lady named Layne Toth. Even at her young age, she is a professional artist along with her sister. They create and sell comic books. The gift was a July 2008 $100,000,000,000 ($100 billion if there are too many zeroes for you to count) note issued by the Reserve Bank of Zimbabwe. Inflation is so rampant in Zimbabwe that the note had little purchasing power at the time of issue and is worth even less today.
On Aug. 1, 2008, the Zimbabwean government dropped eight zeroes from their currency, so this is equivalent to the current Zimbabwean $10 note. At the current foreign exchange rates, it takes somewhere from 13,000 to 16,000 Zimbabwean dollars to be worth one U.S. dollar.
In other words, the government of Zimbabwe has taken a valuable commodity like paper, slapped some ink on it, and made it worthless. Actually - not quite worthless. Instead, it is more valuable being used as an artist's canvas than as a medium of exchange.
Gold, on the other hand, has never become worthless through government inflation. Gold coins and bars have been made into jewelry and other forms of art because the gold represented a long-term store of value. Gold has never been worth zero, and it never will be.
That, in a nutshell, is a quick explanation of why so much of the world's population owns gold as a store of wealth instead of paper fiat currencies. If only politicians could understand this simple lesson as well as the young Ms. Toth.
In response to some past columns, I have received a handful of requests asking for the "proof" that the U.S. government has been working with other governments, central banks and their trading partners to manipulate the prices of gold downward.
The U.S. government, obviously, does not openly admit to such activity, as such an admission would negate the effect of their mostly behind-the-scenes activity. However, there have been various inadvertent admissions by various parties over the years that fit with other circumstantial evidence that continues to mount.
Perhaps one good essay to read that tries to put bits of evidence in one place is to visit the Web site of the Gold Anti-Trust Action Committee (www.gata.org).Click on the Dispatches menu button, then search for the recent essay by Chris Powell, GATA's secretary-treasurer, titled "Gold and silver market manipulation update." This is a written version of his presentation at the just-concluded New Orleans Investment Conference.
Late last week, it looked like gold was being knocked down in advance of possible bad news from the Group of 20 meeting in Washington, D.C. last Friday and Saturday. Then came three bits of news that quickly led gold to rise about 5 percent almost instantly.
The most exciting news was that the government of Saudi Arabia had spent about $3.5 billion to buy physical gold in the previous two weeks. This represents about 5 percent of annual global gold production.
The second item was an indication that the Chinese government may begin adding serious amounts of gold reserves. As is usual with announcements of changes in Chinese policy, this was disclosed by an indirect method. However, I have received some indications that the Chinese government may already be purchasing gold.
Finally, an advisor to the president of Iran stated in an interview that Iran's government has already converted all of its reserves into gold. I'm not sure what to make of this last item. In the recent past, Iran's government has made announcements that later turned out to be huge exaggerations if not outright lies.
Since Iran must have some amounts of various currencies in order to facilitate international trade, the announcement, at best, cannot be completely true. However, it being widely reported and had the effect of putting downward pressure on the value of the U.S. dollar, which is something that the Iranian government would enjoy doing.
Even though much of the news for gold (and silver) has been bleak in the past few weeks, there are signs that prices could shoot up sharply - possibly soon. As always, I recommend holding physical precious metals rather than "paper gold" such as commodity contracts, shares of exchange traded funds, or certificates.
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