Wednesday, May 12, 2010

The Reason To Own Gold

This is a very important article, especially for anyone who uses Euros:

Two Individuals And The Redistribution Of Wealth

Let's consider two hypothetical German individuals, Dieter and Gretchen, and examine how the collapse of the euro relative to the new Deutsche mark affects each of their personal situations. We'll say that Dieter, the first individual, recently retired after having responsibly paid down all his personal debts, and that his life savings consists of having accumulated a bond portfolio with holdings in blue chip European companies as well as various government bonds, with a value of 500,000 euros. And we'll say that while his income is coming in the form of euros from outside of Germany, Dieter pays his bills in the new Deutsche marks within Germany. Furthermore, let's be charitable and say that despite the global financial crisis, none of the corporate and government bonds in Dieter’s portfolio actually default.

Once the euro has collapsed relative to the Deutsche mark, the income that Dieter has coming in falls by 90% in purchasing power terms. For instance, if he was earning an average of 5%, or 25,000 euros per year in interest, these payments would now have a purchasing power of 2,500 Deutsche marks. Simultaneously, the principal value of Dieter’s savings has fallen from the 500,000 euros down to 50,000 Deutsche marks.

People like Dieter are the ones who should be buying gold. And judging by the movement in gold, many of them are buying it right now. Gold is not an inflation hedge, it is a hedge against geopolitical instability. It is what you buy when there is serious speculation that your country might be considering abandoning their currency. This is the type of speculation that can really push gold to unimaginable heights.