Gold Must be Bought Before All HELL BREAKS LOOSE!

A client of mine asked me this question this week, and I had a pretty simple answer. Gold is a store of value, and you shouldn’t view it any other way. A hedge against inflation? In order for a hedge to work, it has to be well in place before all heck breaks loose.
 

Take a bill out of your pocket, and look at the top of it. It doesn’t matter the denomination, as it says the same thing: Federal Reserve Note. Theoretically, holding it gives you a claim against the assets of the Federal Reserve, which are overwhelmingly U.S. Treasury debt obligations and Federal Agency guaranteed mortgage-backed securities.

Basically, the dollar is backed by IOUs, if you want to argue it is backed by anything. Why? Because you can’t really claim your collateral, as the whole thing is non-redeemable, circular, intangible, and practically infinite. So, take your $10 bill and have fun trying to collect anything from the Feds.

That is why the investors I know who own gold own it: the currency we use is intrinsically worthless, and it bothers them. They aren’t trying to get rich quick by holding the stuff in their safe deposit boxes. Far from it. They just want the peace of mind that when “everyone figures it out” they will at least have something people want, or have wanted for millennia. You can think of it more as a long-term insurance policy, as opposed to a short-term play.

To illustrate, in 1994, when I worked on a bond trading desk in Baltimore, someone presented me with a 5,000 Deutschemark bond issued by Kaiser Wilhelm I around 1880. He asked me to get a current market bid on it, and I told him to call the German embassy in Washington or a local coin shop because it was worthless otherwise. Brother, he complained, and loudly, to my boss, but I held firm because I knew what I was talking about.

Another trader at the desk eagerly took the task, and a few Wall Street firms literally laughed at him before he sold it to, you guessed it, a coin shop for a hundred bucks or so. Such as it is with paper IOUs over time. 

However, in 1880, you could have bought around 65 ounces of gold with 5,000 Deutschemarks, which would have been worth around $25,000 in 1994, depending on the day.

That is why you buy gold. It is not necessarily for the next quarter, but for the next 100 years or so.

Source: Montgomery Advisor