Gold is the inverse dollar
The US Dollar & Gold affect each other adversely. It is not the only dollar hedge, but it is a basic one. While buying gold isn’t really the immutable store of value it is cracked up to be, as a valued quasi-currency, it is only being inflated by its 2% yearly production. Money has no value, even golden money; it is just a means of exchange. Or so they say. Yet as a means of exchange, gold is a good proxy for a mirror image of the U.S. dollar.
This isn’t necessarily good for gold. Imagine for some unexpected reason, Japan and Europe were going to devalue their currencies against the dollar. (Oh whoops!) The dollar would be strong. Quite likely that would make gold weak. In the short term “short gold” can be the same as “long dollar.” That could be painful to gold holders, even in the middle of a global financial crisis.
However, in the long run as the value of money falls, so the nominal value of gold rises. As always, it’s the long term that pays off.
Why is Gold political ?
People talk about central banks buying and selling gold as if it is big deal. The question must be asked as to why banks hold gold at all. There are many other things banks can hold to diversify their reserves and most of these instruments don’t need a high security vault that can cost 1% of the value of its contents a year.
So why do governments hold gold?
Government holds gold because in a war, gold is what you end up paying for war materials with international trade. That is how the U.S. ended up with most of the world’s gold at the end of the Second World War.
In war, paper promises significantly to lose their attraction and gold does become money. Gold fluctuates with uncertainty, which can be a double-edged sword. Although you won’t read much of it, positive developments in the real world are bad news for the price of gold.
Gold consumption is approximately 6,000 tons; gold production is 3,000, however…
It’s impressive that consumption is so much higher than production, however gold isn’t sugar. Roughly 700 tons of gold are recycled every year, so just how much of a year’s production is consumed—i.e. lost forever—is hard to say.
Apart from lost earrings and the gold in industrial and consumer consumption ending up in landfill, gold can’t really be said to be consumed at all. With only 300 tons going to make stuff, the rest is going into storage, or dangling off limbs and appendages, ready to pop up for sale when the price is right.
Remember there is $9 trillion dollars of gold knocking around. Let us say there is about an ounce of gold for every man woman and child on the planet with supply growing by 2% a year.
If gold was money that would be way too little. However, as a supply for dentistry, electronics and bangles and some portfolio diversification, that’s probably enough.
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