Stocks, the dollar, bonds, gold, and Warren Buffet

Let’s begin from the end. Warren Buffet likes to claim that gold is not a worthy investment because gold can’t do anything. Own it for a century  and a century later, you’ll own nothing more. It’s not like gold reproduces by binary fission like an amoeba or something like that. And no central bank can print gold.

Buffet is right. Gold is not a worthy investment. In fact, it’s not even an investment at all. It’s a material that stores value. Gold doesn’t go up or down. It’s the dollar that goes up or down. The question is, what would you rather hold: gold, which maintains its purchasing power, or the dollar, which is a man made fiction?

In 2008, stocks began to seriously crash, and the dollar index went up. The dollar index is an arbitrary measurement of the dollar in terms of how many units of other paper currencies it can buy. It means nothing in relation to actual commodities. The dollar index went up because stocks plummeted. Stocks plummet because people sell them in exchange for dollars. So in 2008, everyone was demanding dollars, so the dollar index went up. The dollar was the “safe haven” even though dollars buy less and less every year.

There are other safe haven options. One is US treasury bonds. For example, one can purchase a piece of paper for $1,000 that says that the US Government will owe you $1,100 in ten years, when the US national debt will exceed something like $30 trillion and every penny of tax revenue will be going to the interest payments of creditors like you who, looking for a “safe haven” loaned the US $1000 ten years before. As good as gold, as they say. Sound good?

Traditionally, if stocks go down, the dollar, or bonds, go up. One of the two. This has certainly been the case up to now. But what happens when people suddenly realize the US  dollar actually loses value? The dollar will stop being a safe haven. And what if they start realizing that the US will not pay up on its bonds, just like Greece or Spain? Perhaps they will stop buying them. At that point, bonds will no longer be a safe haven, nor will the dollar.

Will some other currency? Doubtful. All other currencies are backed by the dollar. If the dollar falls, so do the other currencies.

All that’s left is gold and precious metals. Everyone out of stocks, out of bonds, out of dollars. Where does all that money go? Into gold.

As long as either stocks, or the dollar, or bonds – ONE of those three, goes up, then the system is still intact. But the minute all three of those go down simultaneously, the only thing left standing will be gold, silver, and commodities that people actually need to live.

This started to happen on Friday, when stocks, the dollar, and bonds all went down, and gold went up 4%. That was just a taste. We’re not there yet. But we’re teetering.

Warren Buffet is right. Gold is a lousy investment. Own it today and you’ll own the same thing in ten years. The only difference is, by then, you’ll own everything, because gold is a store of value, and value will by then have chased down gold as the only real safe haven. Gold will be money. Buy money now before people finally figure out that paper is just paper.

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