What would happen to gold if a major economic dislocation event occurred ?

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Amanda V's picture
Amanda V
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What would happen to gold if a major economic dislocation event occurred ?

I know that might sound stupid but I really have no idea about economics.

I am considering buying some gold.  But if the American banks collapsed tomorrow would gold be worth more or less ?

Would it be worth more because anybody with any money would be quickly buying it up ?

Or would it be worth less because most people can't get to their money to buy gold ? (and if nobody is buying gold the price goes down).

Anybody with any insight your thoughts would be greatly appreciated.

Thanks.

golsbygolf's picture
golsbygolf
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Re: What would happen to gold if a major economic ...

 

Gold is going to be worth 2000 dollars an ounce before we know it , there has already been a major dislocation in the economy and the government is fixing the problem with the printing press this will lead to hyperinflation and as gold is a hedge against a devaluing dollar it will increase in price

Gibber's picture
Gibber
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Re: What would happen to gold if a major economic ...

Depends also on what your local currency does against the USD

 Gold has been skyrocketing in a lot of other currencies as those currencies have plummeted with respect to the USD.


Notably currencies like GBP, AUD and NZD have all had almost exponential rises in Gold.  So, when Gold goes up in USD, I'm not sure what will happen in those currencies terms. Depends on what happens  to the exchange rate between the USD and NZD, GBP, AUD.

regards,

Gibber

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scepticus
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Re: What would happen to gold if a major economic ...

Hi amanda, I don't think anyone really knows the answer to this question.

I think the answer depends on how the disclocation manifests itself.

If for example, it caused major food shortages in a deflationary environment, gold would drop like a stone, because people need food more than gold, and as long as dollars in peoples pockets remain scarce, then dollars are better than gold when things get tough.

If however the manifestation is currency collapse, then gold should do well.

If the manifestation is total collapse of pretty much everything, a stash of food, petrol and medical supplies will turn out to rise in value much more than either cash or gold.  If you wish to hedge against complete collapse, here is my view of the most valuable tradeable items, in order:

1) medical supplies

2) fuel

3) ammunition

4) silver/gold (silver coins might be better, since they are more liquid than gold coins due to smaller value per coin)

5) long life food items

6) fungible food items

Note that the top 3 all depend on complex manufacturing, so will be more valuable than gold under complete collapse.  

 

 

ivoryjackal's picture
ivoryjackal
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Re: What would happen to gold if a major economic ...

I cannot quote you a source because it's just from memory, but I heard a statistic that went something to the effect that there is one ounce of gold available for every six people on this earth.  i believe this is above ground statistics and is a general estimate, but even if it underestimates by half (and considering how much of that gold is tied up in priceless relics that will probably not be melted down no matter how it gets) it should give you an idea about the scarcity of the material.

when a significant minority of the people realize (as many still do not, i believe) that their paper currencies are created from nothing and that its value is anything but stable, they will likely start buying gold.  even just an ounce or two here and there.  that's all it will take for the price in paper to skyrocket because there really isn't that much of this stuff out there (relative to how many dollars/yen/euro/pound/ruan/etc exist to chase it).  silver will likely be the second place people will turn (and some researchers claim that there is even less available silver above ground than gold) and it should follow suit.

investing in metals may make you wealthy relative to the people around you who didn't (when our currency depreciates violently), but it will ultimately just 'freeze' the value of your wealth.  it's valuable to keep that perspective when buying (rather than think about how many dollars you've made, think about how much less gold/silver your compatriots can afford).

no matter what you think will play out, it's a very good idea to have some exposure to precious metals.  even in the best of times.  it's equally if not more important to hold it physically.  buy coins or bars.  store them in a safe or bury them and make a pirate map.  the exchange traded funds can lie about what they hold, any unallocated service is simply taking your money.  central fund of canada and some allocated storage services might be convenient if you've already got a comfortable supply in your hand, but if there's a breakdown of the electric grid or any other cultural emergency, they're unlikely to do you much good.

to answer your question more directly, gold (and to a lesser degree silver) have been used as natural mediums of exchange for at least 2500 years, likely a lot longer (5000 i've heard quoted).  as long as there is any semblance of a culture or community and as long as anybody desires to trade or barter goods and services, your gold will be useful.  gold is your most basic medium of indirect exchange and it can't be devalued by anyone artificially.

so many people have discussed the evolution (and subsequent de-evolution) of money that you'd be well served to google "origins of money" and get a primer. this film might be a good listen, too:

http://mises.org/multimedia/mp3/audiobooks/rothbard/CATF/CATF_2.mp3

Farmer Brown's picture
Farmer Brown
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Re: What would happen to gold if a major economic ...

Hi Amanda,

I think gold will do well in the long term.  In the midst of a crisis, cash is probably the best option, but for longer-term purposes of protecting real wealth, gold is much better.  This assumes you've already made preparations for a 3-month supply of living supplies.

Patrick

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Re: What would happen to gold if a major economic ...

Regarding the original question, we've seen gold jump lately supposedly correlated with concerns about the financial markets.

I see gold as insurance, not an investment, to protect a portion of wealth long term  Gold prices are likely to be volatile especially in the near future for many reasons, and trying to work out the logic of why gold will head a certain way, beyond the very basic fundamentals CM has identified, is dangerous and difficult in my opinion.  So I wouldn't put any money into gold you might need in the short term, but if you want to protect wealth long term and can choose your timing to sell it later if desired it seems like a good option.

gregroberts's picture
gregroberts
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Re: What would happen to gold if a major economic ...

In an interview on www.commodityonline.com
released Monday, Marc Gugeri, the Fund Manager and Advisor to both Gold
2000 Ltd and the Julius Baer Gold Equity Fund, was asked about the
price of gold. He stated, "The majority of investors purchase
Paper-(Gold)-Futures at the COMEX. The sellers or counterparties of
those Gold-Futures are just a few dominant players. Some of them have
an in-official close link to the U.S. government. So far most of the
investors didn't exercise the gold futures and have accepted cash
instead of physical settlement. This is about to change. I believe that
the COMEX will default and the entire paper gold market will 'crash'
and gold could rise very quickly to 2,000 [or] 3,000 U.S. dollars. When
this happens it will be too late to exercise or to try purchasing
physical gold."

http://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=6218

Greg

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mainecooncat
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Re: What would happen to gold if a major economic ...

Few quick observations:

Gold and silver are currently undervalued regardless of what metric is used, what they are directly compared to, and whether inflation is considered or not. This is because they are "history's money" and as I think Patrick Brown mentioned before we're most likely living in a temporary and clearly volatile cyber/electronic money phase. So they're poised to make a return in spades.

Sightly contrary to what someone wrote above, silver has been used longer than gold as money and slightly outdoes gold in terms of being recognized as "history's money." However, I hold both and wholeheartedly endorse both. Though now -- and this position isn't fueled by any sort of contrarianism -- gold is probably being over-rated and silver under-rated. Silver has a far greater chance of actually being widely used again as money than does gold due to liquidity and scaling issues. Gold at this point and most likely in the future is just too unwieldy in terms of its value. How do you make change for a $5000 gold coin or bar when buying something for 1/100th that amount? The answer: with silver.

Regarding the liquidity issue: One of the problems I see with gold is that there aren't small enough fractionals and their premium is too high. I'd buy 1/50th coins at 10% over spot all day. But 1/10th's at 30-40% over spot. No thanks. Clearly this price dynamic pushes small-price purchasers into silver, as well as those like myself who, when I only have a few hundred to put into bullion coins, go the silver route. Some countries do make 1/20th coins but not the US at this point.

Based upon the above two paragraphs, that's why Silver Eagles are a great investment. I think they'll be the $50 or $100 bill of the future.

The investment angle is also interesting to me. Many claim, as Woodman above I believe, that PM's are more a store of value and a hedge as opposed to a money-making vehicle. I generally agree with this, but I think because of the point in time we're at PM's are now both.

Have many more thoughts regarding this but will wait to see what others think.

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1234567890
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Re: What would happen to gold if a major economic ...
gregroberts wrote:

In an interview on www.commodityonline.com
released Monday, Marc Gugeri, the Fund Manager and Advisor to both Gold
2000 Ltd and the Julius Baer Gold Equity Fund, was asked about the
price of gold. He stated, "The majority of investors purchase
Paper-(Gold)-Futures at the COMEX. The sellers or counterparties of
those Gold-Futures are just a few dominant players. Some of them have
an in-official close link to the U.S. government. So far most of the
investors didn't exercise the gold futures and have accepted cash
instead of physical settlement. This is about to change. I believe that
the COMEX will default and the entire paper gold market will 'crash'
and gold could rise very quickly to 2,000 [or] 3,000 U.S. dollars. When
this happens it will be too late to exercise or to try purchasing
physical gold."

http://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=6218

Greg

 

In CM "Banks on the Brink" issue, he mentioned about JPMorgan's substantial holdings of <1yr contracts.  I'm trying to wrap my head around what's going on there and why???  What happens when those substantial number of contracts comes due in less than a year?  If we (the forum) and Chris could shed some light on this topic I would be greatly appreciative.

 Derek

Craigmandu's picture
Craigmandu
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Re: What would happen to gold if a major economic ...

Mainecooncat,

 

You seem to know a good deal on the subject I have some questions:

1. Is there a difference between the american silver stuff and the canadien etc....

2. Are there online ordering places that aren't scams where one can order and get what they want

3. Are there any kind of limits someone has to pay attention to?

Mike Pilat's picture
Mike Pilat
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Posts: 929
Re: What would happen to gold if a major economic ...

One interesting angle on the whole issue that is an echo of the thoughts of Antal Fekete (see Financial Sense).

In a time of intense turmoil and crisis or hyperinflation, the value of precious metals will likely skyrocket. During this phase, it is unlikely that anyone will "spend" (sell) the gold or silver unless they absolutely have to. Essentially, it's a bit of a positive feedback loop that keeps the price spiraling upwards until a new system is established that succeeds in regaining trust.

According to Fekete, the actual number of transactions will go down significantly. This makes some sense: people are not going to be selling their pm's to get worthless paper they know will be inflated to zero by the next month. Instead, people are mostly likely to play the hyperinflation game as long as it lasts and just use their gold as a store of value (think Gresham's Law). I look at it this way: As long as some currency is pumped out from the government (FED, really), then people will likely use that in a crisis preferentially. The only real time that bartering with metals is going to be needed is if there is truly a situation in which no central authority is controlling money creation. As long as someone is printing money, it is likely that people will try to transact with that rather than relinquish their precious metals. This is what Fekete describes as "gold going into hiding." Thus, I propose that metals are more likely to be used as vehicles to transport wealth rather than for barter. This is not to say they would not be very barter-able.

Of course there's "exceptions" to the gold going into hiding theory. Many might take their store of gold and use it to make an important capital investment (i.e. a house and property that allows them to produce food or have security from unrest). But this fits the basic framework because land and homes are real capital like gold - paper is not. Eventually, the Great Inflation will run its course and there will be no alternative but to establish better money, lest the wheelbarrow industry grow uncontrollably...

Thanks,

Mike 

1234567890's picture
1234567890
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Posts: 7
Re: What would happen to gold if a major economic ...

BUMP

bearing01's picture
bearing01
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Posts: 153
Re: What would happen to gold if a major economic ...

If some American banks collapsed that would create deflation (a contraction in the money supply) and that should make the US dollar worth more because there are less in circulation and there's more demand for them.  Unless of course if the Federal Reserve prints lots more money to give to FDIC to give to the people, this won't happen.  I'm worried that the US dollar will be devalued excessively because the Federal Reserve is printing lots of money to buy government bonds and to bail out corporations. If the Fed didn't do this then the interest rates would go much higher. The Fed will make this an inflationary depression. If the world believes the US gov't plans to buy back its US treasuries, when repaying its debts, by printing the money then that would cause the dollar to collapse. You want to own gold or any other non depreciating asset other than dollars if this happens.

 Interesting, I watched a Peter Schiff video the other day where he was talking to people from Saudi Arabia and he was telling them that all they had to do was buy up all the gold mining companies in the world and that would make them own all the gold reserves. Then they could announce that all the gold would be used for the Saudi Arabian money. That would instantly make their money the most valuable and sought after in the world. Wonder what that would do to the price of gold. I bet Bernanke wouldn't like to watch that video.

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