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Gold bugs buying more for a reason that means they should be selling

Posted by John T. Reed on

“Gold Prices Soar on Trade-War Fears”

That is the headline in a small article in today’s Wall Street Journal.

One of the reasons I do not recommend gold is its price is partially influenced by people known a “gold bugs.” A better word would be kooks.

This headline is further evidence of that. The bugs think gold is good because it’s gold.

No. It is a hedge against inflation. And not because it’s gold but because it is a commodity and a hard asset. ALL durable commodities and hard assets are hedges against inflation. Is gold a better hedge against inflation than other hard assets? Hell, no! It’s worse. Why?…/60940227-disadvantages-of-gold-…

This WSJ headline indicates that the bugs think that gold is the place to go in ALL manner of financial crises, including not only inflation, but also trade wars.

That is almost by definition dead wrong. In inflation, the dollar loses purchasing power. The market prices of all hard assets including gold rise to offset the falling purchasing power of the dollar. That is the theoretical basis for thinking gold is a hedge against inflation. But it is not a good hedge because the government does not want the American people to be able to hedge against inflation. Consequently there are a number of anti-gold laws. I discuss them in the above-linked web article. 

Also, as stated in the article, the U.S. government outlawed owning gold in the U.S. in 1933—because of a trade war triggered Great Depression. Americans were not allowed to own bullion gold again until the 1970s.

So these morons who are buying gold “on Trade-War Fears” are buying an asset that was outlawed in the last trade war. Gold bugs say it was “confiscated” by the government in 1933. That is false. .
The federal government ordered all Americans who had bullion gold to sell it to the nearest Federal Reserve bank by May 1, 1933 for a below market price. So you can say they confiscated the difference between the market price and $20 an ounce. 

The federal government also reneged on all the gold-certificate war bonds it issued in World War I. They had to make them gold certificates because the American people did not trust the U.S. bonds after the Civil War, which occurred only about 50 years before World War I. Those were destroyed by the inflation of the “Greenback Dollar.” 

A gold certificate is a note or bond that promises to pay you in pure gold coins if you wish. In 1933, the federal government reneged on that promise and would only give paper dollars to pay your principal back on your U.S. government bonds.

Trade wars are associated with DEFLATION, NOT INFLATION. Were it not for all the government misbehavior regarding gold, it would be a legitimate hedge against inflation. But the dollar value of all hard assets PLUMMETS during deflation, by definition. So buying gold “on trade-war fears” is like soaking your clothes in gasoline because you fear there will be a fire. 

What should you do regarding gold if you believe there will be a trade-war and resulting deflation/depression? Sell it and put the money in cash. Cash was the winner asset in the Great Depression, along with Post Office savings accounts (which no longer exist) and AAA bonds. Buying gold because you fear a trade war is the exact opposite of what people should do.

My book below is about hyperinflation and depression/deflation. I say in the book that I do not know which we will get. Accordingly, I do not recommend precious metals at all. I recommend nickels and pennies because their melt value protects you in case of inflation and their having their denomination engraved on them protects you from deflation

If you buy dollars because you fear deflation as happened in the 1930s, and we get inflation instead, you will lose all that money because it’s purchasing power will disappear. If you buy hard assets because you fear inflation, and we get deflation instead, you will likely lose 80 to 90% of the hard asset value as happened in the Depression. With nickels and pennies, you can win (inflation because of melt value), but you can’t lose in deflation because the face value of the coins is as low as their value can go.

It is an article of faith among investors worldwide that gold is THE hedge against inflation and hyperinflation. They are wrong. Gold has numerous disadvantages in the role of hedge against inflation. It is a commodity. There are many indications that not only would a broad-based commodity index bet...

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