For the best browsing experience on this site, we recommend you upgrade your browser
AboutSubscribe Your Editors Contact Us RSS

Where to Bury Your Gold

Yesterday’s big news wasn’t really news at all. Standard and Poor’s finally found the nerve to state openly what the rest of the world already knew: the Emperor is naked.

The esteemed ratings service announced that America risks losing its triple-A credit rating. “We believe,” said S&P, “there is at least a one-in-three likelihood that we could lower our long-term rating on the US within two years.”

Officially, America remains the world’s preeminent triple-A credit. Unofficially, America’s triple-A credit is a financial Potemkin Village. It is all façade. The US lost its triple-A credentials years ago, but the rating keeps hanging around – a function of tradition, decorum, politics and complacency.

Behind America’s triple-A façade, its creditworthiness steadily deteriorates.

The budget surpluses of the second Clinton Administration yielded to the $300 billion deficits of the Bush Administration, which gave way to the mind-blowing $1 trillion deficits of the Obama Administration. In the process, America has amassed debts that approach 100% of GDP, while also piling up future obligations that would amount to about 500% of GDP. Both of these debt numbers are only a rounding error away from Greece’s debt-to-GDP levels.

Greece, as you may recall, is the non-triple-A rated country on the verge of declaring bankruptcy. S&P considers Greece a “junk” credit – branding the debt-strapped nation with a BB- rating. Greece, with a debt-to-GDP of about 150%, clearly deserves its BB- rating. But that’s why the US, with debt-to-GDP approaching 100%, does not deserve its triple-A rating.

Why are the heavily indebted Greeks a junk credit while the heavily indebted Americans remain a triple-A credit?

Hard to say exactly. But one very important difference comes to mind. The Greeks cannot print the euros they need to repay their debts, but Americans can, and do, print the dollars they need to repay their debts. A second important difference also comes to mind: Standard & Poor’s is not a Greek company; it is an American one.

As such, S&P’s announcement yesterday began patriotically:

“Our ratings on the US rest on its high-income, highly diversified, and flexible economy, backed by a strong track record of prudent and credible monetary policy. The ratings also reflect our view of the unique advantages stemming from the dollar’s preeminent place among world currencies.”

After saluting the stars and stripes, however, S&P continued:

“Although we believe these strengths currently outweigh what we consider to be the US’s meaningful economic and fiscal risks and large external debtor position, we now believe that they might not fully offset the credit risks over the next two years at the ‘AAA’ level.”

Translation: America is broke.

But you don’t have to rely on S&P’s judgment to realize America’s finances are on a slippery slope. The precious metals markets have been rendering this verdict for several years already. Gold touched another new all-time high yesterday. The dollar’s feeble price trajectory has also been telling the world that America’s finances are broken.

While the dollar remains the world’s reserve currency, it is not acting like it. The dollar’s value has been dropping against just about everything. Really. Everything. Would you believe that the top- performing currency of 2011 is the Paraguayan Guarani? And that’s not all; the next best performing currencies are the Mauritian Rupee, Hungarian Florint, Czech Koruna, Russian Ruble and Colombian Peso.

This is not a joke. Not only are these currencies atop the leader board for 2011, but each of them has also appreciated at least 25% against the US dollar during the last two years. The Colombian peso is up 44%!

To be sure, the Colombian Peso is not about to become the world’s reserve currency. But in a world in which the actual reserve currency has become as reliable as Scottish sunshine, even the Paraguayan Guarani becomes a plausible store of value. Nothing against the Guarani, but if the dollar’s descent gathers steam, we’d rather be holding gold and silver.

In an earlier era, when a dollar bill still commanded respect around the globe, Warren Buffett scorned gold as an investment of “no utility.”

“Gold,” he said, “gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

The Martians are not scratching their heads any longer. Gold’s utility becomes evident every time a government becomes profligate. Therefore, now that gold is rising briskly in value – and Berkshire Hathaway’s stock isn’t – deciding where to bury one’s gold is becoming an increasingly important question.

The folks who are buying gold want to make darn sure that they truly possess what they paid for. The same desire pertains to silver investors. In the column below, guest columnist, Matt Insley, describes some the best ways to safeguard your silver investments…

Eric J. Fry
For Daily Reckoning Australia

Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

Latest posts by Eric J. Fry (see all)

24 Comments

  1. Alan from Canberra says:

    As a subscriber to one of the Port Philip publications I was advised that in buying ‘GOLD’ ETF on the ASX, each share represents one tenth of an ounce of gold. Why is it that when the gold price is approx $1500.00 USD an ounce, the GOLD ETF price on the ASX is trading (as of 130pm 20/04/11) at $137.59. Allowing for the aussie dollar being at say $1.05 to the US dollar, $1500 USD equals AUD $1428.57, so I would expect the ‘GOLD’ ETF on the ASX to be approximately $142.85. Was the advice I was given via the Australian Wealth Game Plan incorrect or does it simply still come down to what punters are prepared to pay to buy a GOLD ETF share on the ASX. Grateful for any advice on this, so that I can get a handle on it.

    Thanks

  2. Lachlan says:

    “Gold’s utility becomes evident”
    hmmm maybe to about half of one hundredth of the population though Eric. Martians are obviously much smarter ;)

  3. Pete says:

    Don’t trust ETFs.

  4. Stillgotshoeson says:

    @Alan If you log into any of the online gold brokers, Perth Mint, Australian Bullion etc you will see that Gold does not actually buy or sell at spot.. There is a premium, commision, fee whatever you want to call it on the transaction.

    If you check out the prices the ETF price will track a lot closer to the “real” price as opposed to the spot price.

    I don’t expect Gold to continue a straight line run up to it’s peak… Expecting a pull back..

    @Lachlan My Bolivian based Aussie Gold miner has had a serious pull back on a SPP. Read an article that said the Bolivian Government are looking to “nationalise” silver mines…. Watching/trying to find out more on this. Will the move on Gold too? Who knows but I have to watch it carefully.

  5. Lachlan says:

    Gidday Shoes. Hope your holiday was great.
    Re: Bolivian gold miners, I did hear about the silver predicament a little and I was guessing you’d be worried. I think one way or another if PMs get too valuable we’ll all have to be careful.

    Crumbs silver futures well over $45. My hard metal is well over doubled in paper value now. Shares are still under-performing the metals and I see some more analyses is starting to come through on the net now concerning this situation. You cant hold a good thing down forever but.
    I hoping the S@P200 will go to the next resistance area at 5400 approx.
    Bought some BCN which I really like, at 15c. If I had extra dough I like IGR which look great on a technical basis. Need to study the fundamentals on it though. Only got recommendations at present.
    Cheers Shoes

  6. Lachlan says:

    Regarding ETFs it seems paradoxical whatever thought process leads people to invest in them longer term. People buy hard metal because they don’t trust paper or the people whose integrity or lack of gives it any value. So why buy ETF’s.. another form of paper?

  7. Stillgotshoeson says:

    Holiday was great Lachlan, We all had a great time.
    I held BCN for a while, ended up selling them off and getting more FML.
    I like them too, just think better value elsewhere at the moment

    Been happy with my Physical Bullion purchases of Silver as well.

    Got a recommendation on ARO for a cheapy with upside.. Yet to look at them or buy.

    Bolivian Miner is less than 3% of my portfolio so not worried per se. Watching with interest though to what happens with them. If I take up the full SPP, it will give me 2 million shares at less than a cent a share. I really think they are a good stock, the political aspect must be watched though.

  8. peterg says:

    might dump this into this column
    its in the spirit of things here.

    http://dailybail.com/home/james-grant-bernankes-easy-money-party-will-leave-a-hangover.html
    he advocates keeping cash so that when inflation arrives you can buy cheap assets on their rise. youd have to be quick wouldnt you, before the paper became worthless?

    and gold should be put into tooth fillings. that way its portable, discrete, hard to get out in normal times, and if you die, you can be cremated and the relatives can go over the pickings thereby saving on minting costs. :-)
    oh, and whilst serving as tooth fillings there is a utility value.

  9. Lachlan says:

    oops BCN as above should be 1.5c not 15c.

    Gidday peterg. James seems has notably forgotten to mention that main reason driving prices higher is the breakdown of suppression schemes as part of the breakdown of fiat power more broadly. The correction in metals is happening now…. and its moving metal prices much higher not lower. The time to spend cash on metal started ten years ago when you could buy very oversold/manipulated down hard assets. Anyone who has been accumulating pm’s on dips rather than holding cash has done very well. Inflation has decimated cash in real terms. Even in the USA inflation is gripping…. while consumers reduce credit. This orchestrated squeeze on the people there will very likely get worse. Someone has to pay. Its not going to be the elite class.
    The dxy did capitulate downside from its neat down trend channel. The chances are increasing for reversal on the buck. Its a good time now to save some powder then? NO way, I’ll buy AUD gold thanks. Its patiently been building for a big move up. Its cheap under the weight of carry into AUD.

  10. peterg says:

    @lachlan hi, mmm yeh glad I don’t “wish for ” or have these money problems, though I might have spent more time on studying them to get that way (like you seem to have). one thing that impressed upon me in that vid was the potential for trouble if inflation ‘galloped’ to 5-7%.
    theres not much room to manouvre when you’ve got debts on overinflated assets in a struggling economy. that’s where the house price crash will kick in I think.
    one would think that inflation and radiation alike are good for the elites. some are saying (he said, she said) that the elites are panicking. if so, why can’t they just rest on their laurels and become good Henry Ford style Citizens? the mob isn’t out yet. why “double up” and play russian Roulette? painted into a corner perhaps, gambling addiction, too good to fail. interesting times no doubt, particularly for someone such as I who hasnt read enough history.

  11. Lachlan says:

    I have not too much money to worry about pg rather just a plan to save in terms of pm’s to later buy land on which to base my revegetation seed business and do a bit of sustainable living. Do you own your own pad pg? I’m not an owner..was once.

    There is some amazing although also very sad history of speculative/predatory banking empire collapse in Europe in the 1340s which is repeating almost perfectly now. The world population was decimated in the event. It’s well worth some research. I intend to do more reading on it although it is a bit of a killjoy for sure so not something for a sunny Sunday mate…maybe to read just before bed time.

    Anyhow have a great day peterg…just me and the moo cows here today ;)

  12. peterg says:

    @Lachlan. yep, 60 acres of ex banana averaging 30 degrees slope. no debt. (that’s another silly thing about land prices, how you could earn enough on a place like this to be worth paying what it would sell for – its all about faux ‘lifestyle’ on the back of industrialisation.
    would be ok if I had good knees, I don’t and despite DRA ‘advice’ last year in an article, I cannot ignore the limitation. might be in for a replacement yet, at a young and tender age of 47.

    heres a link for non-entertainment purposes, April 2007. http://www.youtube.com/watch?v=MUDfYcY0CIM
    I actually thought of DRA swatching it – around half way through this he’s ‘onto the money’ in a similar fashion as here..

    cheers.

  13. Lachlan says:

    wow pg that link goes down really well with rum and valium…. ;)

    Seriously though it’s so interesting what’s behind the curtain….you know once the matrix feeder tubes are pulled. I don’t think things have ever been much different in history, just that various types of conditioning allows people to think it is/has been. Personally I like to know the truth (plausible arguments at least) but hope that better things come about anyhow. Well it’s best to keep pushing for your dreams at least and just use what you know to help yourself and anyone else you can along.

  14. Lachlan says:

    Re:farms..they may not stack up as a fiat profit spinner but people can still own them and earn elsewhere. Just like any asset we own them at the mercy of other people with power and to think otherwise is wrong. People waking from the matrix are screaming about it I know but since when was it any different? This is one reason I like to spend time living in the open away from comforts…despite the fact that it is necessary for me to make a margin on my business activity. I know emotions are a great vulnerability. We can tame them somewhat and adapt quicker to changing circumstances.

  15. Lachlan says:

    http://myprops.org/content/How-Venice-Rigged-The-First-and-Worst-Global-Financial-Collapse-660-Years-Ago/

    Takes in history of 1340 banking collapse and bloody period of crusades and Mongol Khans

  16. peterg says:

    yep, I quite agree. I’m going into my mediation/Bhuddist phase now. getting ready come what may. and you’re right ’twas always thus (though radiation contamination is a uniquely modern and potentially permanent blight). I can’t even get into the Anzac spirit . have to guard against believing every anti-thing though. blind cynicism is just as bad as herding it with the sheep. there’s light on the hill and in the spirit , that’s how people survived when times were much more challenging, though living in your own Schhittt and rape and pillage were no doubt par for the course across most spectra of societies. that’s how you get dumb assed burly blokes and princess deserving gorgeous chicky babes.
    one thing for sure, it IS interesting. off for now, see you on another page in this virtual neck of the woods. Is BP sick or sulking? :-(

  17. prozak says:

    more gold bug stuff here. I always love it.

    gold has no utility

    It is the current darling of the investment world for sure.

    Regardless of boom and bust land is the only real asset. And I am certainly no property bull or spruiker.

    It is the ONLY asset that all humans rely on for existence
    It is the only asset with thousands of years of history and rights of ownership.
    It is the only asset that gives you the utility of acquiring other assets.

    Lets not forget – it is not even 100 years since gold was confiscated by governments and not even 40 since it was price controlled.

    But what about the inevitable property crash?

    To be quite frank, and I know it sounds like I am some property mad bull, if you never sell and only buy who cares what the current price is?

    I only care that when I die my son & daughter will inherit all my land (via a trust) and be taught NEVER SELL LAND…. EVER….. NOT EVER….

    ps. of course trading from one piece of land to another is acceptable if you don’t have the means to keep accumulating without trading.

  18. prozak says:

    should i bother also adding….

    You can’t protect or bury your gold without land!

    :)

  19. peterg says:

    @ prozak, not taking anything away from the basic fact of gold but it does require a certain level of intact society for it to be useful (did Australian aborigines use gold I wonder?)

    caught this on a Fukushima/survivalist blog.. things you must not say at the end of the world.

    “Say Mister, do you have change for this gold bar?”

  20. prozak says:

    Peterg,

    yes, good point.

    If all of a sudden mankind was repulsed by gold what would happen to its value?

    Again, without being classed a mad property bull, Land is the only real asset.

  21. Lachlan says:

    I would love to own a swath of fertile grain/cattle properties for sure prozac but governments can, have and will take it from you when they feel like it just like any asset at all, yes gold included. I would not be able to bury land anywhere. Its times like the past few years I’ve realised just how hard it is to protect any type of wealth from those that would take it off me one way or another. Life’s a gamble.
    The utility of gold is money though. Hosni Mubarak couldn’t steal Egypts land, he took their gold. Good money is easily transportable.

  22. Lachlan says:

    Little of the US public gold was obtained by confiscation. They were also paid cash ($20.67/troy oz) for the gold which could be re-invested elsewhere. Rare gold coins were exempt.

    In 1949 Communist China took farm land away from it’s owners and gave it to farmer peasants. Later they didn’t like the way this system was going so they took the farmland from these and developed larger communes.

    The USSR began collectivizing farmland in 1927. By 1940, 99.8% of the sown area was collectivized.
    That’s farm land anyhow..what I would choose.

    Residential land may have problems when considered over long time frames. Development of slums maybe? How does the intrinsic value of such compare with farmland, the means of production? Storing wealth is difficult in this dog eat dog place.

  23. prozak says:

    Lachlan,

    Interesting examples, but you and I don’t live in China or the USSR.

    When was the last time land was confiscated en masse by a western country?

  24. Lachlan says:

    “When was the last time land was confiscated en masse by a western country?”
    Never admittedly. However its my view that the relative freedoms enjoyed in the west are/were only a product of relative abundance. Human nature is a constant however and as resources become scarcer cycles of freedom and oppression should logically become apparent, as has been elsewhere for millennia.

    Interesting here on DRA now Prozac…we have to argue our cases in the back blocks of dusty old entries. Does anyone know or care?…I doubt it. Are these the things bachelors resort to for amusement?…apparently so ;)

Leave a Comment