The New Case for Gold – Jim Rickards

What is so special about gold? To James Rickards, American lawyer, frequent commentator on finance, and author, gold is an essential piece of one’s investment portfolio. He argues that as gold is what’s used to back up fiat currency, in the case that the banking system fails and people lose faith, gold will always be used as a standard of measure due to the fact that gold is one of Earth’s only chemical element in which can be easily mined, relatively stable, resilient, and enough to serve the Earth’s population. He states that gold should make up 10% of your investible assets, excluding your equity from your primary dwelling, as a form of insurance. Here are some points to the book:


1. Gold will always be used as a measurement for a medium of exchange due to its properties. There are no elements in the periodic table that’s as good as gold. Professor Sella deftly leads us through a tour of the table. He shows that most of the matter in the universe is completely unsuitable for money. He then zeros in on that handful of elements that are suitable and singles out the one that is nearly perfect for the purpose – gold. Sella quickly dismisses ten elements on the right-hand side of the table, including helium (He), argon (Ar), and neon (Ne). The reason is obvious – they’re all gases at room temperature and would literally float away. They’re no good as money at all. In addition to the gases, Sella rejects elements such as mercury (Hg) and bromine (Br) because they’re liquid at room temperature, and are as impractical as the gases. Other elements such as arsenic (As) are rejected because they’re poisonous. Next he turns to the left-hand side of the table, which includes alkaline elements such as magnesium (Mg), calcium (Ca), and sodium (Na). These are no good as money either because they dissolve or explode on contact with water. Saving money for a rainy day is a good idea, but not if the money dissolves as soon as it rains. The next elements to be discarded are those such as uranium (U), plutonium (Pu), and thorium (Th), for the simple reason that they’re radioactive. No one wants to cary around a form of money that might cause cancer. Also included in this group are thirty radioactive elements made only in laboratories that decompose moments after they are created, such as einsteinium (Es). Most of the other elements are also unsuitable as money based on particular properties. Iron (Fe), copper (Cu), and lead (Pb) don’t make the final cut because they rust or corrode. It’s bad enough when central banks debase your money. No one wants money that debases itself. Rowlatt and Sella continue on their trip through the periodic table. Aluminum (Al) is too flimsy to use as coins. Titanium (Ti) was too hard to smelt with the primitive equipment available to ancient civilizations. Once the process of elimination is complete, there are only eight candidates for use as money. These are the so-called noble metals, situated about in the center of the table, consisting of iridium, osmium, ruthenium, platinum, palladium, rhodium, silver, and gold. All of these are rare. Still, only silver and gold are available in sufficient quantities to compromise a practical money supply. The rest are extremely rare, too rare to be money, and difficult to extract because of very high melting points.


2. A collapse in the economy and faith in the U.S. dollar will one day come. As capitalist economies are cyclical, there will be times of booms and busts; there’s no industry that’s invincible to this. By owning gold, you hedge yourself against an economical bust. Because today’s international monetary system is largely based on the U.S. dollar, a new collapse will be triggered by a collapse of confidence in the dollar and its role as a store of value. It may be surprising. Still, such collapses do happen every thirty years or so. Based on the monetary history of the past century, we’re probably at the end of the useful life of the current international monetary system and fast approaching a new one.


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3. When you buy gold, don’t think of it as an investment as it’s more of a form of insurance. Gold is not an investment, because it has no risk and no return. Warren Buffett’s well-known criticism of gold is that it has no return and therefore no chance of compounding his wealth. He’s right. Gold has no yield; it’s not supposed to, because it has no risk. If you buy an ounce of gold and keep it for ten years, you end up with an ounce of gold – no more, no less. Of course, the ‘dollar price’ of a gold ounce may have changed radically in ten years. That’s not a gold problem; it’s a dollar problem. To get a return on an investment, you have to take risk. With gold, where is the risk? There is no maturity risk, because it’s just gold. It won’t ‘mature’ into gold five years from now; it is gold today, and always will be. Gold has no issuer risk, because nobody issues it. If you own it, you own it. It’s not anyone else’s liability. There’s no commodity risk. With commodities there are other risks to consider. When you buy corn, you have to worry: Does it have bugs in it? Is it good corn or bad corn? It’s the same with oil; there are seventy-five grades of oil around the world. But pure gold is an element, atomic number 79. It’s always just gold.


4. One of the best ways to preserve your wealth and mitigate risk is to diversify your holdings in your portfolio; wealth isn’t really created through diversification, really only through focus. Having said that, consider owning some gold in your portfolio. As a twenty-first century investor, I don’t want all my wealth in digital form. I want part of my wealth in tangible form, such as gold. You can’t hack gold, you can’t digitally delete or erase gold, and you can’t infect it with a computer virus, because it’s physical. Given the turbulence afflicting the international monetary system today through currency wars, cyberfinancial wars, and the war on cash, my forecast for gold remains that it is headed for a much higher dollar price in the not-distant future. The economic circumstances and conditions that support this analysis have not changed. Gold’s resiliency in a time of turmoil has been proven tim and time again.


By Ryan Lee


My rating:
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