Well, this is supposed to be the reason for all of this massive, new, unprecedented, astonishing, astounding economic stimulus spending; it supposedly bails out debtors through the brain-dead expediency of inflation in prices, thus aiding debtors at the expense of everybody else!

Whether or not this theory is true, I don't know, but I don't think so, as I have never read anything like, "From the moment that the government started creating and spending large amounts of money, everything got better and better, and the more money that was created for the government to spend, the better things got, until they reached Utopia and everybody lived happily ever after."

And by the term "at the expense of everybody else" I do not mean "me" and I do not mean "you", as all we need do is take the simple precaution to convert everything into gold, silver, oil, weapons, ammo, maybe a large-screen TV and a comfy recliner-chair for your Mogambo Bunker Of Cowardly Retreat (MBOCR), plus some yummy treats of various highly-processed salty and/or chocolate varieties full of sugar and chemicals to keep that crucial sharp "edge"!

Mr. Ash notes that Stephen Harmston, erstwhile economist at Bannock Consulting, wrote that "across 2,500 years, gold has retained its purchasing power, relative to bread at least" which is seemingly proved when one considers that "It is said that an ounce of gold bought 350 loaves of bread in the time of Nebuchadnezzar, king of Babylon, who died in 562 BC" which is roughly what it buys today, a stretch of 2,500 years, while the dollar, on the other hand, has lost 97% of its buying power since 1913, less than 100 years ago, when the detestable Federal Reserve was given its diabolical unholy control of the nation's banks and money by a corrupt Congress and allowed by a corrupt Supreme Court.

Mr. Harmston is not interested in hearing my "The Federal Reserve is evil and so is the Supreme Court" rant again, especially since it is all I ever rant about, but goes on to reveal that, "The same ounce of gold still buys approximately 350 loaves of bread today."

Drawing myself up, I let a victorious sneer cross my face as I say, "This proves to me that gold holds its value when nothing else does, and especially against a fiat currency, which never does, either, only a lot faster! Hahaha!"

Nobody laughed at my little joke, and I decided that perhaps they wanted something more data-oriented instead of my stupid little jokes that never really make complete sense when you stop and look at them.

So I look, and with gold at $993 and cheap bread at about $3 a loaf, it looks to me like gold is just about where it was for the last 2,500 years! Amazing!

And the better news is that it will get better than this, as Patrick A. Heller at numismaster.com writes, "The money supply of all of the world's major currencies is now increasing by 10-30 percent annually. With the gold supply increasing by less than 2 percent annually, it is a virtual certainty that all currencies will fall in value against gold" and as bread crosses that $5 per loaf mark, and that $7 per loaf mark, and that $10 per loaf mark, then gold will go up right along with it!

And with universal participation, because all currencies will fall due to over-issuance, everybody in the whole world is going to jealously watch their neighbors and relatives making profits by buying gold and holding it against the guaranteed loss of buying power of their money! Wow! Everybody in the world!

And how many people does it take, with universal participation, to make a boom in gold like you've never seen before?

Whee! This investing stuff is easy!

The Mogambo Guru
for The Daily Reckoning Australia

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These assets - bonds backed by US home-buyers with low (or no) incomes - had become utterly illiquid. No one would buy or lend against them, not at any price. And an asset you can't sell or borrow against is worth precisely nothing.

The resulting mayhem? It would have sounded frivolous two years ago. But the subprime crisis caused the first run on a British bank run in 130 years, a forced collapse in US interest rates, and the fire-sale of Wall Street's fifth largest investment bank for just 16¢ on the dollar.

"[Now] it seems that the financial system is slowly working its way through this subprime shock," writes Gillian Tett in the Financial Times. "The largest banks and institutions have written off almost $200 billion and raised more than $100bn-odd of capital to plug this gap.

"Indeed, the write-downs have been so vast that some analysts expect to see some write ups in the next set of results."

Crisis over? That key marker of investor anxiety, the gold price, fell 15% from its top of mid-March to the end of April. The preceding surge had taken gold bullion up from $650 per ounce in August to above $1,030 the day after Bear Stearns was sold to J.P.Morgan.

The proximate cause for gold's jump - and then setback - was the Federal Reserve's decision to slash US interest rates. Gold turned sharply higher as the Fed began cutting rates in Aug. '07. It only flagged when Fed policy-makers implied a pause in their war against the Dollar (albeit it temporary) seven months later.

Cheap money and the inflation it causes makes gold bullion an attractive asset. Central bankers can't print it; investment bankers can't promote it to destruction. But "in addition to being generally positive for gold prices, the credit crisis brought counterparty risk to the fore," as Nikos Kavalis of the GFMS consultancy in London reminded us here at  BullionVault by phone this week.

That's why a significant portion of new gold investment since last summer has gone into physical metal - owned outright - rather than simply into paper promises or credit arrangements.

"In many cases, we've actually seen investors moving away from positions they already had in place, moving out of both unallocated accounts and gold derivatives, and into allocated metal," says Nikos.

"Largely as a result of the crisis in the credit markets, a number of high net worth individuals have invested in physical gold."

Unallocated gold is the gold market's major concession to financial trickery (a.k.a. "innovation"). Merely a book-entry on a credit ledger, it works much the same as a bank account - only without deposit insurance - representing a loan from the buyer to the brokerage.

That leaves the investor very much "on risk" with regards to the brokerage's financial survival. And it's been estimated to us here at BullionVault that well over 95% of the world's daily gold dealing is still done on an "unallocated" basis.

What makes physical bullion stand out for the growing number of private investors choosing outright ownership instead? Gold futures or options would, after all, give them leverage to the gold price, super-charging their gains if they call the short-term direction correctly.

But leverage pays nothing if your counterparty defaults. And for investors with money to lose, physical gold bullion sits in a much-needed asset class all of its own.

First, the physical gold market centered in London is one of the deepest and most liquid capital markets in the world. Turning bullion into cash is easiest for investors dealing warranted gold bars. Kept in professional storage to retain maximum resale value, gold held in the form of these large 400-ounce bars also avoids wide dealing spreads and commission fees, too.

Repeated studies also prove gold's safe-haven appeal on the basis of its "non-correlation" with securitized assets, such as equities and bonds. Gold prices move independently of the broader financial markets - neither together, nor in opposition. This lack of correlation makes gold a crucial component of any diversified portfolio.

Finally, physical gold bullion - provided that it is owned outright - is unique amongst tradable assets; because it's almost entirely devoid of counterparty risk. You'd be surprised how many investors, both private and professional, fail to realize the difference.

Owning the metal outright - whether as gold coins in your pocket or large bars held securely in market-approved storage - takes you "off risk" with regards to the solvency of banks and brokerages. And it leaves you holding a highly liquid physical asset that's instantly valued just by checking the gold spot price online.

"While the subprime shock may be ebbing," continues Gillian Tett in the Financial Times, "the problem is that...as the US economy slows, there is a good chance defaults will soon emanate from the corporate and consumer debt world.

"And the more that banks are forced to tighten credit as a result of the subprime mess or other losses, the greater the risk that this second wave of defaults will emerge - creating the risk of a vicious spiral."

The current lull in the gold price says fewer investors are worried today. But only this week, Moody's Investors Service - one of the three credit-ratings agencies now blamed for letting investment banks issue toxic subprime bonds as "triple-A" bonds -  warned of a sharp rise in US corporate-bond failures. It sees the default rate on low-rated junk bonds quadrupling to 4% by the end of this year.

Wherever the subprime shock has hit hardest, municipal debt also looks weak. Council members in Vallejo, California voted on Tuesday to file for bankruptcy, thanks in no small part to "house prices in Vallejo and the surrounding area falling some 26% on a year ago," reports The Independent here in London. "The city is expecting $1.6 million less in property sales taxes."

And all this while - 12 months on from the first trouble at UBS and Bear Stearns - the final cost of the subprime shock itself is still pending. Chairman of the Federal Reserve, Ben Bernanke originally put a $100 billion forecast. The International Monetary Fund (IMF) has since set the ceiling at $945bn.

But there are hidden costs too, as Bloomberg reports this week. Now State Street, the world's biggest institutional fund manager, faces more than $625 million in lawsuit damages, for instance, after being sued by four insurance companies for putting their cash into subprime bonds without their approval.

Let's imagine all of your wealth is sitting safely outside the next subprime-style blow up. A loss of confidence in one sector can still become a system-wide crisis. And the failure of subprime bonds to pay up should have reminded us all that counterparty risk remains very real, no matter how clever derivatives salesmen become.

A growing number of private investors, in contrast, would rather hold at least some of their wealth in a liquid, tradable asset, entirely free from the risk of default. What price they pay should depend on what they think will happen to interest rates.

But the value of gold as a portfolio back-stop remains hard to beat, even 15% below the last all-time high of mid-March.

Adrian Ash
For The Daily Reckoning Australia

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