GOLDBUG: Why buy and hold gold?

In one of our semi-regular meetings of the old foggies’ society, I was trying to defend my love of the shiney metal to Luddite and Frau Reinke. Luddite’s wife stayed out of the fray; she’s the strong silent type. You know! The type that hangs back, listens carefully, and then forms her own opinion.

So why gold?

(1) It’s the only currently available “store of value”. Remember the dismal science’s (Economics) formulation of “money”? The first one was store of value that didn’t rot, erode, or get eaten by rats. Today’s fiat currencies are eaten by the gooferment rats.

(2) It’s not subject to the gooferment’s inflation tax. If you think about it, the gooferment funds its current version of guns and butter by debt to the Chinese, inflating / printing money, and taxes. If there was only a hundred dollars, and the gooferment prints five more, then you could understand that your dollar was worth less. The market place quickly adjusts prices to reflect reality. (In actuality, when more “money” is availble to pay for something, the price will rise due to the action of competing interests.

(3) It’s really an “off the books” investment. While it doesn’t throw off interest, what do you call the increase in purchasing power due to inflation?

[As an aside, you really have to laugh when the gooferment charges you a "capital gains tax" on the inflated value of an asset. If inflation is, for example, 5%. (Some commentators guesstimate it is as high as 18%!) So you buy a hundred dollar stock, in a year it goes up $5 and you cash out. Of your 5$ gain, 15% is paid in tax to the federal gooferment -- 75 cents.  And the kicker is that your 105$ is really -- if inflation is 12% -- only worth 92.5 as measured in the prior year dollars. It compounds annually. Do you really think that a Kendall Park NJ house that was 12k new in 1950 is magically worth 330k in 2007? What did they use golden nails? No the dollars are depreciating and all things held in non-dollars are being repriced to reflect reality.]

(4) There are some interesting  nuances in holding American Gold Eagle, which are produced by the gooferment (i.e., the Treasury Department’s Mint), and are asserted to be dominated in dollars. The one ounce gold American Eagle is stamped 50 “dollars”. AND, it is really worth ~940 “dollars” in Federal Reserve Notes. (There’s a recent tax case where the employer declared his employees earnings in “dollars” as represented on the Eagles he gave them. Everyone paid less taxes.)  Does my estate executor report any coins I don’t give away to my heirs prior to my death in the metal value OR the “face” value.

<< IMHO — this bears on gift taxes, inheritence taxes, and anything where one has to report value.>>>

(5) When one wants to give a gift, you are limited to 12k without reporting it to the gooferment. So, if I give Eagles at face value, that’s 240 ounces. Or,  ~225k$ in Federal Reserve Bank Notes (Those funny green peices of paper).

(6) When one is at the end of one’s life, and the death taxes are facing you, you give a few coins to each visitor. No tax due!

In short, I think you have to think about gold differently.

Now Luddite brought up that in TEOTWAWKI (The End Of The World As We Know It) scenario, gold will be useless.

I disagree. You will be able to trade gold for stuff. You’ll need tools to keep what you have (like a gun). But, gold has a demonstrated history of being the “money of last resort”. In turbulent times, gold is highly valued.  His argument was that an ounce of gold was too much to pay for a loaf of bread. (Depends upon how hungry you are.) But Eagles come in different weights half, quarter, and tenths of an ounce. So just as today, you’ll need “change”. (Try buying a loaf of bread with a hundred dollar bill!)

I don’t give much credence to the TEOTWAWKI  scenario that trading gold for stuff will be difficult. I think that is the low probablility scenario. But gold does have value as part of portfolio and financial plan. (The coins; not gold stocks,  not gold IRAS,  not any kind of paper representing gold!)

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