Saturday, December 4, 2010

I am a gold bull

Having gold in portfolio seems crazy to many. However, to me it has been increasingly easy to add to my gold and gold stock positions even though the price of gold has skyrocketed. I am no gold bug. I don't believe that we should return to gold standard (i.e. that paper money in circulation should be convertible to gold at a fixed exchange rate). Instead, I am a gold bull. I not only believe that it's good to own gold as portfolio diversifier, but I believe that it is quite possible that it will be the best performing part of my portfolio. So far, it hasn't been. I have paid a price from my gold bullishness and also from my overally defensive stock portfolio. I probably have lost to most indexes. So far.

It is sobering to read economics 101 books. Equally so, it is sobering to study how central banks and fiat money work. Ever wonder why we have inflation? ....It's not some "law" as in gravity or second law of thermodynamics. It's created by the central bank in control of the fiat money in question. They add money to the system via banks as long as they get the inflation rate they are targeting. Why it's important to have inflation?  ... So that you spend your money and don't sit on it like Uncle Scrooge. Because sitting on money (i.e. saving) causes deflation (i.e. negative growth - job losses etc.) if everybody does it. And that's not good. Therefore, we have to have some of it. Not too much, not too little. Just "right" amount.

The fact that central banks cause deliberately inflation leads to the fact that economies have to grow atleast at the inflation rate. Otherwise, economy will be actually declining in real terms. And that's why we just gotta have always growth. Not necessarily real at all. But people are lot happier that way. They get salary increases and they think that they are getting more wealthier. It is just the perfect scheme.

You really can fool most of the people ALL THE TIME. But you can't fool all of the people all of the time. I was long fooled, but I am no more. For me gold is money. When I don't keep all of my savings in stocks and property, I invest some of it to gold. I also have to keep paper money: dollars, euros, swedish krona and so on for practical reasons and to hedge my cash positions. The reason I hold gold and cash should be obvious to anyone following the financial news. The situation does not need much more sparks to get the fire really going. I really hope it does not happen, but who knows. Anything might happen. You got basically a currency war brewing: the mighty race to bottom. When US devalues, other have to follow. Not just because they want to keep their currency "cheap", but because that's the ultimate way to get the debt load reduced.  And it might work, if just most of the people have faith.

It's all about faith. What we really have is a faith-based monetary system. And right now, the gold charts tell me that more and more people understand where we are headed ultimately and try to protect atleast part of their wealth from the doom day scenario. I really hope we don't eventually get hyperinflation, but inflation we will have. Because the central banks make everything to get the inflation started. The big risk here is that they really don't understand how global economy works. Nobody does. So they might overdo it. Then it's the 70s all over again.

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