Should the Governments Buy GOLD?

 

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The World Gold Council reports that the world’s central banks hold roughly 29,000 tons of Gold. Photo by Richard Perry/ New York Times.

 (Article reprinted from The New York Times,  Aug. 2, 2011.)

 

 Introduction

Private investors and central banks have scrambled in recent years to stock up on gold. This summer, they drove the price over $1,600 an ounce for the first time ever.

For millennia, people have killed and died in pursuit of gold. In the recent downturn, so many investors have been eager to buy gold that it is sold in vending machines. Governments are as captivated by it as individuals are: for nearly a century, many nations’ central banks have stashed hoards of gold bullion in a vault at the New York Federal Reserve.

When asked recently why central banks hold gold rather than, for instance, diamonds, Ben Bernanke said “tradition.” Given the long history of humans considering gold valuable, does it make sense to continue this tradition, or should central banks focus on other assets with more intrinsic value?

Debater 1:   It Had to Be Gold

By Sanat K. Kumar, who spoke to “Planet Money” about gold in February,  is chairman of the Department of Chemical Engineering at Columbia University.

Anyone trying to think of some other element or compound to take the role of gold should consider why it has been used as a currency since time immemorial. If we are looking for something to be useful as currency, we need a commodity that meets a few requirements: First, its composition must be easy to define. It should also be relatively immutable, but not so inert that it cannot be purified into the form that is acceptable as an asset. It should be rare but not so rare that it is impossible to find. It is easy to see how ancient civilizations came to consider gold a magical, mythical material: it satisfied all these demands.

Gold is relatively unreactive, but it has a low enough melting point that it could be processed easily by past civilizations. In contrast, something like platinum, which is also relatively inert chemically, has a melting point of 3,000 degrees Celsius. This made platinum almost impossible to process until relatively recently. Similarly, gold is rare in the earth’s crust, but there is enough of it to go around.

Still, times have changed. Let us consider the issue today: Processing is no longer a problem. We can readily purify elements like platinum, rhodium and others, or we can synthesize any desired compound to practically any degree of purity. The issue of contamination is also no longer germane.

Thus the only modern requirements for an asset are rarity and immutability — and a suite of compounds and elements would qualify. So gold is no longer the one and only thing that could be used as an asset. Indeed, Ben Bernanke is correct — the argument for it is simply tradition. The value placed on gold comes from an emotional attachment handed down to us from our ancestors.

Debater 2:  A Proven Asset

By Ron Paul, a United States representative from Texas who is running for president for the third time, is the founder of Campaign for Liberty. He is the author of “The Revolution: A Manifesto” and “End the Fed.”

No asset has intrinsic value. An object is only valuable insofar as it is able to satisfy the wants and needs of individuals, and its value is determined by the subjective judgments of individuals. No other commodity has been as universally valued over time and across as many societies as gold.

Gold satisfies all the properties of money. It is durable, portable and easily divisible into bars and coins that share uniform properties. It is easily recognizable through visual, tactile, chemical and other means. Gold’s value and purchasing power are stable over time, as its supply grows slowly and it cannot be created ad infinitum as paper or digital currency can be.

Because of these properties, gold has always been considered an ideal store of value and medium of exchange, and central banks have always sought to hold it because it is the ultimate monetary backstop. When society and the monetary system break down, even if nothing else is accepted as a medium of exchange, gold still will be.

The Federal Reserve does not actually own gold; it only holds gold certificates as an asset. It is the Treasury Department that claims ownership of United States gold reserves. Historically, gold itself circulated as money, in the form of coins. Paper currency began to circulate for the sake of convenience, but these were only promissory notes that could be redeemed in “lawful money,” i.e. gold, on demand. Once the use of paper currency was established and most gold was held in bank vaults, the government seized the gold and left the people holding paper that could no longer be redeemed for gold. The paper currency was immediately devalued by 40 percent, reducing Americans’ purchasing power by an equal amount.

I would prefer to see the government not hold the gold it does. It should be returned to the people from whom it was taken. There is no need for the government to hoard gold or to keep gold in vaults as backing for currency; gold itself should be the currency that circulates.

 

Debater 3:  Gold Fever Is a Symptom of Inflation Fears

By Allan H. Meltzer, a visiting scholar at the American Enterprise Institute and the Allan H. Meltzer University Professor of Political Economy at the Tepper School of Business at Carnegie Mellon University, is the author of “History of the Federal Reserve, Volume I: 1913-1951″ and “Volume II: 1951-1986.”

Gold was money through most of our history, although after 1934 it was restricted to settlements between central banks. Its role in international payment settlements was further restricted in 1968, and it ended in 1971 when President Richard M. Nixon embargoed gold sales and floated the dollar exchange rate. After 1971, several central banks sold some of their gold stocks because the only revenue from holding gold is the speculative return if the gold price rises. After all, gold is no longer money, and holding it earns no interest.

Gold is a commodity with a unique history. It allows individuals to readily transport large monetary values, so it has long been favored by refugees. People who fear inflation or confiscation of wealth buy gold, expecting it will be stable or rise enough to protect the holder. That was true for European refugees in the 1930s, and French and Indian citizens have long been famous for holding gold.

Today, uncertainty about the future financing of large U.S. budget deficits and inflationary Federal Reserve policy are increasing the demand for gold. People in China and other nations with inflationary policies are also stocking up on it. Saudi Arabian sheiks protect part of their wealth by holding gold.

The modern frenzy for gold is a symptom of a fundamental concern: inflation. The world would benefit from an agreement by major central banks in Europe, Japan and the United States to maintain zero inflation. China could join after it removed its exchange controls. That agreement would allow other countries to fix their exchange rates and “import” low inflation. The world would have both more stable prices and more stable exchange rates.

The unrestrained U.S. monetary policy since we abandoned gold has not provided stability.

(End of reprint)

Follow the example of the central banks around the world; add Gold to your investment portfolio. APMEX is one of the most trusted and largest dealers of Gold and precious metals. APMEX maintains one of the world’s largest selections of precious metal products, including the popular Gold American Eagle Coins and the Gold Canadian Maple Leaf Coins.   

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7.29.11 WEEKLY RECAP

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The eyes of the world are on Washington while Gold spot prices are at record-highs.  Investors all over the globe have a stake in the outcome of the debt ceiling negotiations.  With each passing hour, the nation moves closer to a crisis and anxiety builds.  Markets reflected that anxiety this week. Precious metal prices are up due to safe-haven buying strategies and stocks are down sharply.  In fact, the Dow Jones Industrial Average is set for its largest weekly decline in over a year, while Gold pushed to record high spot prices three times this week.

In Hong Kong earlier this week, Secretary of State Hillary Clinton spoke to Chinese investors. She spoke reassuringly that “political wrangling” is a part of democratic problem-solving. She explained that the U.S. is working towards resolving the disagreements and improving the country’s long-term fiscal outlook. She also framed the debt debate as a sort of bump in the road.

The partisan tactics being employed by U.S. political party leaders became clear on Wednesday when both President Obama and House Speaker John Boehner made televised addresses.  President Obama clearly showed that the two sides are no closer to an agreement that would allow the U.S. to raise the debt ceiling in order to avoid what most analysts describe as a devastating default. “For the first time in history, our country’s triple-A credit rating would be downgraded, leaving investors around the world to wonder whether the United States is still a good bet,” he said in remarks late Monday. Obama was quite critical of the Republicans’ unwillingness to compromise but he made it clear that he expects a compromise package on his desk this week.  

In his rebuttal, House Speaker John Boehner pointed the criticism back towards the President and the Democratic Party. He categorized the Democratic plan as “full of gimmicks.” There is still the expectation that an agreement will be reached, albeit a short-term one. Their concern is that the credit rating agencies may still downgrade the U.S. credit rating if they see no significant steps taken to reduce long-term debt.

Another concern is the Commerce Department data that reports any economic growth we were experiencing had actually started to wane late last year, not this year as a number of economists’ data implied. Previous reports had the economic growth at 1.9% during the second quarter, but in actuality it only grew 1.3%. According to Ryan Sweet, a senior economist at Moody’s Analytics, “The economy essentially came to a grinding halt in the first half of this year…We did get side-swiped by some temporary factors which are fading, but it raises some concerns about the sustainability of the recovery.”

WEEKLY SPOT PRICES

Gold:
Spot Gold prices opened this week at $1,600.60. The all-time record high was on Friday, July, 29th at $1,637.50, while the low for the week occurred on Monday, July 25th at $1,600.60. Gold ended the week up $27.40 at $1,628.00. This week, the most popular Gold bullion products were 2011 Gold American Eagles, 1 oz. Pamp Suisse Gold Bars, and 2011 1 oz. Gold Maple Leafs.

Silver:
Spot Silver prices opened this week at $40.16. Silver reached a high of $41.47 on Wednesday, July 27th, while this week’s low for Silver occurred on Friday, July 29th at $39.30. Silver ended the week down $0.21 at $39.95. The most popular Silver products on APMEX.com this week were 2011 Silver American Eagles, 2011 Silver Maple Leafs, 1 oz. Silver Buffalo Rounds and 10 oz. APMEX Silver Bars.

Platinum:
Spot Platinum prices opened this week at $1,799.00 and ended the week down $17.10 at $1,781.90. Popular Platinum products this week included, 1 oz. Platinum Bars, 1/10 oz. Platinum American Eagles, and 1 oz. Platinum American Eagles.

Palladium:
Spot Palladium prices opened this week at $807.90 and ended the week up $15.40 at $832.30. Palladium investors preferred 1 oz. Pamp Suisse Palladium Bars and Palladium Canadian Maple Leafs this week at APMEX.com.

 

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½ oz Gold First Spouse Coins

In 2007, the U.S. Mint released the first four coins in a series of Gold First Spouse Coins. These coins are the government’s first  1/2  oz. 24-karat gold coins. They are also the first commemorative 1/2 oz. Gold coins. With a face value of $10, these .9999 fine Gold coins are minted and released annually in the order the First Ladies served in the White House. The First Spouse Coins are minted in Proof and Uncirculated condition. Each First Spouse Gold Coin will coincide with the release of the four annually circulating Presidential $1 Coins.

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A Special Message from Michael Haynes, CEO of APMEX.

 

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 >>>WATCH THE VIDEO <<<

With the looming debt ceiling crisis, Michael Haynes, CEO of APMEX, offers his unique perspective about the global and U.S. economies in these uncertain times and highlights the importance of diversifying your investments. As CEO of one of the world’s largest and most trusted online precious metals dealers, his insight comes from more than 30 years in the precious metals industry.

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How The Debt Ceiling Affects YOU

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With the recent chatter about the U.S. debt ceiling, the possibility of a default, and a credit ratings downgrade for the U.S., it’s easy to want to tune out the noise.  Many people have the misconception that the whole situation doesn’t affect the average American; the world of high finance is so far removed from their world as to not have an impact on their way of life.  Nothing could be further from the truth.  Let’s take a look at how government bonds tie all the way from Wall Street to Main Street.

When the government needs to borrow money, it cannot resource a local bank branch for a loan.  To borrow money, our government sells bonds to investors.  These investors are mostly foreign central banks and large investment institutions.  The investors buy the bonds which gives money to the government.  The government pays the investor back their original investment, plus interest, over time.  The interest is based on both the market conditions at the time and the creditworthiness of the government (loan rates are determined by the borrower’s credit score). 

In the case of the U.S., the government’s credit rating is AAA (pronounced “triple-A”) which is the highest rating possible.  For this reason, the U.S. government pays astonishingly low interest rates.  At the time of this writing, the interest rate on a 10-year U.S. treasury bond is 3.03%. The high U.S. credit rating is currently under review by many of the credit ratings agencies.  Even without a government default, many agencies are considering downgrading the U.S. credit rating simply because our government’s current spending path is completely unsustainable. If the U.S. credit rating is downgraded, then the U.S. will pay higher interest rates to attract investors to purchase their bonds.

The U.S. bond interest rate forms a foundation for all other interest rates.  In other words, the higher the interest rate on U.S. bonds, the higher the interest rate will be for all lines of credit. This is called a direct correlation.  The U.S. will pay higher interest in order to get investors to buy their bonds; therefore, U.S. citizens will see their loan rates go up.  For example, the average 30-year fixed mortgage rate is typically, but not always, about 1.7% above what the government pays to borrow money. If the government pays a higher interest rate on U.S. bonds, then mortgage rates and other loan rates will increase.

This trickle-down effect could be seen throughout our economy.  From the homeowner looking for a mortgage, to the small business owner looking to expand, a shopper looking for a new television, or even the farmer who needs a loan to get through the growing season, credit is the oil that lubricates our economy.  Additionally, if the U.S. credit rating is downgraded, we could soon be paying higher prices for all purchases.  It won’t matter how high an individual’s credit score is or how many bills he or she has paid on time, that person will still be subject to the rising tide of interest rates.  A rising tide lifts all boats and this tide may be coming as we speak.

By Robert Davis, APMEX Account Manager

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Gold As An Insurance Policy

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Are you intrigued about the reasons why investors are purchasing more Gold? A primary reason for this interest in Gold is its role as an insurance policy. Possibly because no one has ever defaulted on Gold, it is considered an insurance policy that will pay out when needed.  The following are examples of how Gold reinforces that belief and how it provides financial security and protection against uncertainty:

  • The fragile economic recovery we are experiencing in the U.S.
  • The high level of debt in our cities, states and federal government.
  • The fragile economic recovery in the European Union, Russia, Japan and many other parts of the world.
  • The sovereign debt crisis in Greece, Portugal and Ireland that threatens to spread into Italy and Spain and eventually the entire European Union.
  • The geopolitical tensions in the Middle East; India and Pakistan; North & South Korea and elsewhere
  • The volatile currency markets. Even Central Banks are becoming less reliant on paper money and trading it for gold.
  • The devaluation of the U.S. dollar.
  • Investors try to deal in financial markets which move at the speed of light, and where “flash crashes” occur and one year later can still not be explained.
  • Inflation in the U.S. and other countries where governments choose to print more money to cover their debts.
  • Black Swan Events. The recent earthquake, tsunami and nuclear reactor problems devastated Japan. Unexpected events with severe negative consequences cannot be predicted. We know they will come but we cannot anticipate the time and locations.

Gold holds value in times of uncertainty where your other investments do not. There is an old saying, “Put 5-10% of your money in Gold and 90-95% into the three primary asset classes; then every night go to bed and hope Gold prices go down because that means everything else just went up.” 

Geoff Varner, APMEX Account Manager

Weekly Recap 7.1.11

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Happy Independence Day, America!

As U.S. Independence day approaches, the American debt crisis is becoming the main focus of the news. The attention on the European Union’s problem was lessened due to recent developments in Greece making a bailout seem more likely. Greece and the euro zone crisis has not resolved, but the shift in focus probably reflects a sentiment that the American debt crisis is more imminent. 

The week started with the bipartisan meetings on debt ceiling already fractured after republicans walked out on Friday, citing disagreement over tax increases.  On Monday, President Obama met with leaders from both parties individually in an attempt to restart talks.  The deadline to pass an agreement to lift the debt ceiling is August 2, at which time the U.S. would have a bond payment due without the means to pay it.  This would result in default, which most analysts agree, would push the U.S. back into a recession.  Standard & Poor’s, a ratings agency, said they will lower the rating on U.S. debt to “D,” the lowest possible, if an agreement to raise the debt ceiling isn’t reached in time.

Things didn’t look much better for the U.S. on Tuesday.  Republicans and Democrats became further entrenched in their respective camps.  Things were on the upswing for Greece however, as France and Germany pushed for a “Plan B” for Greek debt in an effort to prolong a default and allow themselves as long as possible to prepare for it.  A default still looks inevitable. Also, the IMF got a new chief, Christine Lagarde.  This announcement follows the arrest in New York of Dominique Strauss-Kahn, former head of the IMF.

Greece’s parliament passed new austerity measures on Wednesday. This move was demanded by EU members and by the IMF in exchange for another round of bailout aid.  Some experts remain skeptical of the final outcome, and hold the view that a default is still inevitable.

QE2 officially ended on Thursday.  The weekly jobless numbers were released and the report showed an extremely slight improvement in the unemployment situation; the data only showed a decrease of 1,000 unemployed workers.  Also on Thursday, protests sprang up in Egypt.  Thousands of people, mostly youths, took to the streets of Cairo, were frustrated at the slow pace of court cases against top officials of the previous regime.

The Institute for Supply Management released data on Friday showing an increase in manufacturing productions, easing fears of a double dip recession.  The stock market had a strong positive response with major indexes posting impressive three percent gains for the week.  The dollar also strengthened which brought the price of metals down somewhat.

Gold:
Spot Gold prices opened this week at $1,501.40. The high during the week was on Thursday, June 30th  at $1,514.80, while the low for the week occurred on Friday, July 1st at $1,478.30. Gold ended the week down $13.70 at $1,487.70. This week, the most popular Gold bullion products were 2011 Gold American Eagles, 1 oz. Pamp Suisse Gold Bars, and 2011 1 oz. Gold Maple Leafs.

Silver:
Spot Silver prices opened this week at $34.43. Silver reached a high of $35.16 on Thursday, June 30th while this week’s low for Silver occurred on Monday, June 27th at $33.38. Silver ended the week down $0.50 at $33.93. The most popular Silver products on APMEX.com this week were 2011 Silver American Eagles, 2011 Silver Maple Leafs, 1 oz. Silver Buffalo Rounds and 10 oz. APMEX Silver Bars.

Platinum:
Spot Platinum prices opened this week at $1,678.40 and ended the week up $42.10 at $1,720.50. Popular Platinum products this week included, 1 oz. Platinum Bars, 1/10 oz. Platinum American Eagles, and 1 oz. Platinum American Eagles.

Palladium:
Spot Palladium prices opened this week at $734.30 and ended the week up $27.70 at $762.00. Palladium investors preferred 1 oz. Pamp Suisse Palladium Bars and Palladium Canadian Maple Leafs this week at APMEX.com.

 

Featured Product of the Week:    1 Ounce Silver Britannia Coins

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In 1997, the Royal Mint produced one-ounce Silver Britannia coins issued only as proofs with a mintage of 20,000. Created to appeal to both collectors and investors alike, the design of the Silver Britannia coin pays tribute to British nationalism and pride.

The obverse of the 1997 issue of the silver coin features the “Third Portrait” used on British decimal bullion coins dated from 1985 to 1997. In 1998, the obverse design of the Silver Britannia coin changed to depict the “Fourth Portrait,” a more mature likeness of Queen Elizabeth II. The reverse of the Silver Britannia coin illustrates the Standing Britannia, which appears in a horse-drawn chariot and resembles the Roman figure Boudica. The Standing Britannia image was originally engraved by G.W. De Saulles and used on the Gold Britannia coins for most of the issues following 1987. The Royal Mint seems to have settled on a pattern of alternating the classic Standing Britannia image and a special design on the reverse of the Silver bullion coins.

The Silver Britannia coins are also popular for their Silver value. With a face value of two pounds, the Silver bullion coins are .958 fine Silver, as opposed to the standard British sterling of .925 fine Silver. APMEX sells Silver Britannia coins in uncirculated and proof. APMEX makes it easy to buy the Silver Britannia coins of your choice by offering a wide selection of Silver Britannias and competitive Silver prices on all Silver bullion coins.

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Take the APMEX 5 Day Challenge!

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We are a society of “movers” and we are constantly on the go.  We consume gallons of coffee and energy drinks to keep us alert and we eat power bars to keep us going. Who has time to search for news about the economy, the geopolitical scene, and the precious metals market? We want our information to be short, concise and right now.  APMEX realizes the importance of your time, the significance of knowing current events, and how it pertains to your portfolio.

APMEX takes the time to find this news for you. APMEX combines it into a few short bits to keep you informed and prepared for what is happening in the world; saving you from having to put your day on hold to search and sift through an overload of information.  You will find this market information in the APMEX daily commentaries delivered Monday-Friday:  8:00 a.m., 12:00 p.m., and 4:00 p.m. (CDT.) You have the opportunity to read the one-page articles as they are posted, or you may read all three posts at the close of each business day. By the end of this 5-day business week, you will be more educated about the value of your precious metals portfolio and the events around the world that affect your investment.

Take the APMEX challenge!

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