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Why $1000 Gold Is Now Significant

13 September 2009 357 views No CommentEmail This Post Email This Post

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Friday the 11th September 2009 marked a historic moment.  It’s the first time the price of gold actually closed above a $1000/ounce. Previous, it had breached the $1000 level only to face heavy selling pressure and a close below the magic level. Due to this, it seems as if $1000/oz is a psychological barrier for gold. Surpassing this level puts us in uncharted territory with no overhead resistance or psychologically important price points. In technical terms, this is a bullish indicator for gold.

Fundamentally, the case for gold is even better. While Indian demand for gold jewelery has dropped in the face of $1000 gold, demand from the Chinese government, hedge funds, ETFs and speculators has picked up the slack. One of the key concerns is the US government, who’s profligate spending has driven the country in to bankruptcy.  By the White House’s own admission, even if the economy recovers, the US will still incur an additional debt of $9 trillion on top of the existing $11 trillion in deficit spending it already owes.

Currently the government pay around 3.09% interest on its debt or about $340 billion per year.  There is some concern that US government will face difficulty in meeting its financial obligations through tax collections alone and will (actually already has) resort to printing money. Printing money, technically termed as “quantitative easing” or the monetary policy of the Zimbabwe school of Economics, devalues the US Dollar and causes hyper-inflation.

If you don’t believe inflation is a reality, just crunch the numbers.

In 10 years, the government (or govmint since there’s less governing and more minting of money) admits that in a rosy scenario it will owe $20 trillion (excluding Social Security and Medicare obligation since we don’t technically owe interest on these IOU’s). Even if interest rates are at the currently prevailing rock-bottom rate of 3.09% (which I seriously doubt) that’s nearly $2 billion a day in interest payments. At a more likely rate of 6%, that nearly $4 Billion a day or $1.46 trillion a year! But lets assume its $2 Billion a year. According to the US census bureau, the current US population is 307 million, and we can estimate it will be 357 million by year 2019 (according to the estimation tool on Political Calculations blog).

The 4 Billion in interest payments is money that the US Congress spent over and above all your federal taxes, state taxes, city and municipal taxes, property taxes, sales taxes and payroll taxes.

This equates to a hidden indebtedness of approximately $2,016 per US citizen per year.

As if all these taxes weren’t enough, the government is now putting you (and your future generations) on the hook for an additional $168 per month in interest payments for ever. Note that is does not cover the principal repayment. This is also an optimistic scenario. If the economy does not recover, it is likely to be far bigger. Also the payments towards Social Security and Medicare are also not counted and will make the calculations appear worse than I just estimated.

The only way to cover these payments is by printing more money.

Since most countries are printing more money to match the US, there isn’t much point in substituting your US Dollars for another currency. All of them are in a death race to total devaluation. The only way to protect yourself is through buying gold and silver. There is a good reason that gold and silver have worked as a currency for 5,000 years of civilized history and a few decades of Bretton Woods cannot change that. That reason is human nature, and in particular human greed. People in power cannot help but over-promise and under-deliver and use devaluation or coin-clipping to get more mileage out of the existing currency.

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In ancient Rome, the Emperor would shave or clip off a part of a silver coin as it passed through the treasury and melt down these clippings to make new coins. This would increase the money supply without the added cost of actually having to mine silver or wage wars to steal someone else’s silver. This is how inflation existed 2,000 years ago!

Today, however the method is much more sophisticated. The central bank (or Federal Reserve in the case of the US) will simply print more money or simply increase its money electronically. The ease and efficiency with which this can happen can cause hyper-inflation without much effort. Just look at Zimbabwe.

The only way to protect yourself  and your standard of living is through the purchase of gold and silver.

No matter what your income level, you cannot afford to be without some portion of your investments in these precious metals. While everyone may not have the resources to buy $2 billion worth of gold and gold-related investments like hedge fund manager John Paulson, who recently put nearly 50% of his fund in the shiny yellow metal, you should definitely allocate 5-25% to it.

The easiest way is to buy small amounts of gold and silver each money. In effect you are dollar cost averaging into them just like you would into stocks. Even with the price of gold being $1,000/ounce, the spot price of 1 gram bar of gold is only $32.15. Even if you add a premium to that, you’re likely to pay less than $40 for the bar. Similarly, today the silver price per ounce is $16.73 which means you can buy a silver eagle for under $25, or a 10 ounce silver bar for under $200. Incidentally, 1 ounce = 31.105 grams.

Don’t wait for gold to hit $2,000 or silver to hit $50 per ounce before you decide to jump in!

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