Gold Even More Attractive as Cash Yields Approach 0%

January 13, 2009

I've had my fair share of philosophical arguments in regards to gold and economics. Most of the time I feel like I'm shadow boxing because I'm usually introducing elements to my opponents that they've never been exposed to. And when I expose them to the pragmatism of gold, they are usually flustered and respond back with the logic that has been spoon fed to them by the powers that be. Most of the time, I may as well be talking to a wall because people don't seem to respond well to painful realities. Oh how easy it is to fool the lemmings!

It utterly bewilders me how educated folks have such a hard time understanding basic economics. It's really not that hard to understand.

One of the most common assaults against gold is the idea that it doesn't pay any interest. Well, duh. It doesn't pay any interest because there is no risk involved in holding it. Usually you are paid interest because there is a certain amount of implied risk to holding a certain asset, and this is measured by the yield. Gold has no risk because there is no obligation attached to it. Once it's in your possession it's yours. That's it. End of story.

When you hold bonds and Treasury instruments, they pay interest because there is a possibility that you just may never get your money back (no matter how slight that may be). And guess what, there is also an inflation element. Inflation eats away at your purchasing power. In a credit based fiat-monetary system, as we have right now, there is nothing keeping the supply of funny money from growing, so inflation is built into the system and hyperinflation is just around the corner.

And hey, isn't that nice. Now that I think about it, there is an inflation element built into gold! When inflation rages, gold holds its value. The average person will see this as an increase in the "price" of gold, but in reality gold is not moving up or down, the money in your pocket is just getting more and more worthless! Curiously enough, in deflationary environments gold does just as well. During deflation, the demand for liquid 'money' increases, as we are witnessing right now. Gold has held up remarkably well during this time of massive de-leveraging. If you compare gold in relation to the currencies of the world you'll see that it's done phenomenally well. I encourage you to view this Adam Hamilton article to see exactly what I mean.

Guess what folks, Treasuries don't pay enough to cover the inflation rate. And yet you still have all the risk of default, inflation risk and lost opportunity cost. This argument has got absolutely no more legs to stand on. The argument is worthless.

The most recent treasury yields are below. I got them from the Treauries website.

January 2009

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