Gold - future insurance?
By Murray Bourne, 04 May 2006
I have been following the rapid increase in the cost of gold for some time now. I devoted a section to it in Interactive Mathematics: Gold Rush?.
A lot of the increase is speculative (traders are pushing it up in the hope of making a quick buck) but there are fundamental reasons why gold is worth considering as a hedge against future financial meltdown (consider the enormous deficits that the US currently has - and what will happen if Asia or the Middle East suddenly decides, or needs, to sell their billions of dollars worth of bonds).
One of the newsletters on gold that I get (from BullionVault) has this interesting thought-piece on how financial markets work today:
Banks, pension savings, mortgage guarantors and all the major financial institutions on which we depend are now tied up in a web of undelivered assets. A is the registered owner of a bond payable by B, the principal on which has been credit-swapped out to C. The terms are controlled by a deed drafted by an investment bank D, which itself receives the interest, which has been aggregated with 30 others and sold notionally to E. E is foreign, and flattens the FX risk with a bank F, who sells and rolls a future on his long currency book, which is bought by another bank for an assured profit by running the position against a higher yield bond bought from a junk-status borrowing customer, which has been insured against the risk of default with G, a major insurer, who happens also to be A.
This is part of their sales pitch for wanting us to buy physical gold - because that's where the buck stops.
In 2001, gold was at $250 an ounce. Today as I write (4 May 2006) it is the biblical $666.
As you read this, the price now is:
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