Should Investors Use Gold as Hedge During Times of Financial Uncertainty?

“It is well that the people of the Nation do not understand our banking and monetary system, for it they did, I believe there would be a revolution before tomorrow morning.” –Henry Ford

Yesterday when the House of Representatives voted down the financial bailout package,
the Dow Industrial experienced its biggest one-day drop in the Index's 102-year history falling 777.68 points.

And there still is no financial plan in place to help revive the economy.

Historically during times of financial uncertainty, investors have turned to Gold as a hedge. This is because gold is the type of investment that is always an asset. (not simultaneously someone else’s liability).

"Investors are leaning toward it as a hedge against what could happen next,” says Carlos Sanchez, a precious-metals analyst with CPM Group.

But, according to the author of an article I found at www.InflationData.com , Gold is actually a “crisis hedge’ not an “inflation hedge.”

During times of crisis, governments tend to lose control over the price of Gold. However, during more peaceful times, governments are able to keep a ceiling on the price of Gold. This causes Gold to move up in a “stair step” manner.

The author of this article at inflationdata.com also says that gold as an inflation hedge has “a very spotty record.”

But is Gold is a bad investment now? Of course not. However, I do tend to agree with the author’s notion about why the price of gold has not done well over the last twenty years. (See image: price of gold over last 20 years).

The author infers that Governments have historically been known to buy and sell Gold on a whim to create an a sort of “illusion of stability.” The low volume of the gold market compared with say the stock market also lends to it being seemingly easily manipulated by governments.

Most investors in my circle don’t know that, up until about five years ago, it was illegal to invest in gold in China. When that market opened up, obviously there was an increase in worldwide demand for gold when China was free to buy Gold. (See image: price of gold over last 8 years) By 2006, the Shanghai Gold Exchange had become the world’s largest trading exchange for gold bullion with its trading volume well ahead of London, New York, and Hong Kong! Now that’s an incredible fact to ponder on when looking at the price of gold.

But if not Gold as an effective inflation hedge then what are some other inflation hedges?

Commodities ?

Price Inflation is defined as the increase in the costs of various commodities. (Although it is also caused by an increase in the money supply). The idea is that, by investing in various commodities, you should be able to at least break even. What commodities have historically done well in times of inflation? Oil. And oil is also a primary component of the increase in the consumer price index. Also, think about the fact that China is also increasing the global demand for oil along with gold. China will also increase demand for other precious metals. And what about world demand for food and what that will do to its prices? Yippee.

 *Inflation indexed bonds ?

Yes, there is such a thing .These bonds have an inflation adjustment characteristic. But they are not adjusted according to the “actual” inflation rate of course.

Any other suggestions for inflation hedges besides the ones I’ve mentioned in this post? Or any thoughts on utilizing gold as an inflation hedge? Read more!

Gold Recorded its Biggest One-Day Gain in Nine Years

Is this the start of a new bull market in gold?

The price of gold soared 9 per cent in one session to end the Wednesday trading session at $US850.50 an ounce. This percentage gain was the most in one session since September of 1999.

BGF Equities analyst Warwick Grigor said, “A large move in gold overnight is a signal that times are changing. It is not an intra-market movement — it is more fundamental.” He also said, “This could be the start of a new bull market in gold.”

But why has the price of gold being going down in the last few weeks? One reason is that hedge funds have been getting rid of their gold to raise cash to pay brokers who had lent them money to make investments. However, this was slightly offset by the Fannie Mae/Freddie Mac bailout that actually pushed gold prices up.

Analysts think the price of gold will continue to rise in the next few months. What do you think and why?

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Gold,Peace and Prosperity by Dr. Ron Paul

For anyone interested in the topic of Gold, check out this book that discusses gold that I think everyone should read. It is called “Gold, Peace, and Prosperity” by Dr. Ron Paul. You can also watch the video on Youtube here:

Has anyone read it and would like to comment? Any comments on the video?

Posted by Dave Carlson of Project Liberty

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How Undervalued is Silver Compared to Gold?

A few things to consider when thinking about investing in Silver or Gold. Silver is way under valued compared to gold. First lets look at the silver to gold ratio. On average over the last 6 months the ratio has been 52:1. In other words it takes 52 oz of silver to purchase 1 oz of gold. The US mint calls it 50:1. On their one ounce silver coin is stamped "one dollar" and on their one ounce gold coin is stamped "fifty dollars". This alone is a huge deception! Now look at the actual physical supply of gold and silver in existence today. It is 17:1; this means for every oz of gold that exists there is 17 oz of silver. Now lets look at the highs of the 80's. Gold reached $850 per oz and silver reached $49.50. This is a 17:1 ratio. Now look at the current gold price of $910 an oz. This means silver should be $53.53; but it is not. The current price of silver is only $17.50. What an awsome deal!!! I highly recommend buying silver right now!



Posted by Eric Malachowski of Project Liberty Read more!

Urgent Alert: Why Gold Will Jump $200 in One Day

I am sounding a "trading alert" in this column. The alert is cheap gold. Dirt-cheap gold.

As any contrarian knows, the biggest, fastest payoff a speculator can earn is when an extreme situation corrects itself.

For instance, betting against tech stocks was unbelievably profitable in 2000. This was one of the greatest extremes in the history of finance. Techs traded for 100+ times earnings (many had zero earnings), so the likes of Cisco, Yahoo, and JDS Uniphase had tremendous distances to fall.

The same goes with homebuilding and mortgage stocks in 2007. "Extremely" stupid lending practices helped send mortgage giant Countrywide Financial from $43 per share to $5 per share in just 12 months. Shorting Countrywide and homebuilding shares was like sitting down at a broken slot machine.

Right now, we have an extreme situation in the commodities market… one you can use to make a lot of money in gold. It all comes down to the gold/oil ratio. Because gold and oil respond similarly to inflationary pressures, the two tend to trade in a predictable range.

Over the past 25 years, one ounce of gold has bought, on average, 15 barrels of oil. When an ounce of gold can buy 20 barrels of oil, it's expensive and due for a fall. When an ounce of gold can buy less than eight barrels of oil, it's cheap and due for a rise.

Right now, gold buys you just 6.5 barrels of oil – less than half its traditional purchasing power. The tremendous rise in crude oil prices is the cause of this situation. Crude has gained 155% in the last 18 months. Gold has gained "just" 50% in the same time. As you can see from the chart below, this disparity has left the rubber band pulled extremely tight.

There's no guarantee this extreme will work itself out quickly. But this is one trade worth keeping on the radar. If oil stubbornly refuses to correct from its levels above $140, gold could easily pop to $1,000 and beyond in just a few days. In 2005, a similar extreme reading preceded gold's rise from the mid-$400s to the mid-$600s.

If you haven't bought gold as "catastrophe insurance," now is a great time to do so. If more cockroaches crawl out of the mortgage debacle and into mainstream headlines, you'll likely get a $100-$200 per ounce jump in your investment. Whether it's through buying bullion, gold stocks, or an ETF, right now is an extreme opportunity in gold.

Good investing,

Brian Hunt,
Editor in Chief, DailyWealth Read more!

Listen to PL Advisor interview on Gold Investing with Dr. Paul!

For this episode of Live On Purpose Radio, Dr. Paul interviews Eric Malachowski, who has an interest in and considerable experience with gold and silver. The diluting of paper money is discussed, with the solution being a return to real value, both in our money and in our focus. Finding the ways that you can personally add real value to others is the foundation of establishing a firm economic future.

The interview can be heard here at Live Purpose Radio Read more!

Abandoning our Gold Standard=Abandoning our Morals?

According to history, does the Gold Standard provide more than just a sound monetary system? Does the economy affect the morals of a society?

These are questions I find myself asking as I have learned more about the history of money, particularly the use of fiat currency in history in lieu of gold and silver.

What is the evidence?

In 1935, there were three Gold Clause cases brought before the Supreme Court where all three plaintiffs were disputing the confiscation of gold during the Roosevelt administration and the abandonment of the gold standard. In effect, these case were testing the constitutionality of the U.S. government casting aside the gold standard in a Joint Resolution of Congress in 1933.

Publius This resolution effectively amended the Constitution (contrary to the Amendment process in Article V) voiding Article I, Sec. 10, Cl. 1 wherein it states "[No State shall ...] make any Thing but gold and silver Coin a Tender in Payment of Debts...".

No big deal, right? All is well in America because a gold standard, a fixed monetary standard with specific weights and measures, is not necessary anymore, right? We need to put our trust and faith in the Federal Reserve and the direction it most assuredly gave the FDR Administration, right? Regarding the allowing of money issuance to be given to a private bank, Jefferson said:


"I believe that banking institutions are more dangerous to our liberties than standing armies . . . If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] . . . will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered . . . The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." -- Thomas Jefferson -- The Debate Over The Recharter Of The Bank Bill, (1809)

Jefferson, as well as many of wise and history-learned men and women, warned us about amending the Constitution and putting the power to control the issue of currency in the hands of private banks. Abandoning the gold standard was the next logical choice, right?



Were there any warnings, even prophesies, made at the time of this Supreme Court decision? Did anyone see something wrong with the above-mentioned resolution?

The simple answer is yes. Justice James C. McReynolds was one of the four judges that disagreed with this resolution and voted against it. The speech he gave was considered to drastic to be printed in the court records so a spoken version was printed in the Wall Street Journal on February 23, 1935. As you read excerpts from his comments, think about the questions I posed at the beginning of this blog piece.

"Mr. Justice Van Devanter, Mr. Justice Sutherland, Mr. Justice Butler and I do not accept the conclusions announced by the court. The record reveals clear purpose to bring about confiscation of private rights and the repudiation of national obligations. To us these things are abhorrent and we cannot believe the wise men who framed the Constitution intended they should find shelter there. On the contrary, words that ought not to be mistaken strictly inhibit them."





"It is impossible to estimate the result of what has been done this day. The Constitution as many of us have understood it, the Constitution that has meant so much, has gone. The guarantees which men and women heretofore have supposed protected them against arbitrary action have been swept away. The powers of Congress have been enlarged to such an extent that no man can foresee their limitations. We stand today stripped of the fundamental guarantees we heretofore supposed stood between us and arbitrary action."



"No one denies the power of Congress to adopt a monetary system, but is does not follow that because Congress may adopt some monetary system that it may adopt any system. I must adopt a reasonable and proper one to carry out the purpose for which the power was given. What was the purpose? It was to fix standards, to permit Congress to provide a circulating medium. It was not intended to enable Congress, under the guise of law, to repudiate. It was intended to give Congress the power to meet its honest obligations. That was the effort in the Legal Tender cases. But here we have the monetary system---the intent, I almost said the wickedness, of which is almost beyond comprehension."





"We protest. That never was, it never ought to be law. Shame and humiliation are upon us."



"...anarchy and despotism are at the door. Moral and financial chaos may confidently be expected..."



What is all the fuss? Was Jefferson right? Was Justice McReynolds right?



Any thoughts?
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