Jack Heald

Lacking an understanding what money is and does, you cannot begin to understand why gold is historically the best money. The qualities that all good money will ideally posses are:

1. Durability – does it rust? rot? corrode? melt?
2. Divisibility – does its value change when divided into smaller units? Two halves of one cow is not nearly as valuable as one whole cow.
3. Portability – Can it be easily transported?
4. Non-counterfeit-ability – the reason for this attribute should be obvious
5. Homogeneity – are different units of the same size essentially identical? Not all oranges are identical, nor are all cows. OTOH, gold is gold is gold is gold.

Gold has been the preferred form of money for 5000 years because it is a commodity that possesses all of these qualities.

All fiat currencies are portable, homogenous and divisible. But they are easily counterfeit-able, (just crank up the printing press and make more!), and not remotely durable.

Look at the list of hard commodities traded on the Chicago Mercantile Exchange and you will see things that have been used as money over the millenia. They all have drawbacks of one sort or another, except for gold.

Silver is closest, but it has industrial as well as monetary uses. This dilutes its value as money. Platinum is similar to silver, but much rarer than gold. In fact, all the industrial and rare-earth metals share gold’s qualities, but they all have significant industrial use. Gold is nearly useless as an industrial metal. Strangely, that lack of industrial value actually increases its usefulness as money.

Oil is very close as well. It doesn’t degrade over time, is very easily divisible, and impossible to counterfeit. But because it is a liquid, it tends to be difficult to transport. And of course, like silver, it also has great industrial use.

Salt used to be money, but it lacks durability. Get a good rainstorm or flood and your money literally dissolves before your eyes. Livestock and agricultural commodities have also been used as money, but they all lack one or more of the qualities that gold possesses.
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Commodity-based monies impose fiscal discipline on governments. If a government wants to run a deficit, they have to come up with a way to collect actual money. They can take it from the people by force, but they cannot create it out of thin air.

Imagination-based monies, (fiat), impose no such discipline. With a fiat money, government is free to run up huge debts, and then pay them off with money they create out themselves. This makes it much easier to do incredibly stupid things, like start crazy wars, support military bases in 159 countries around the globe, and bail out giant banks that make crazy, risky bets and lose.

For those of you asking yourselves, “should I buy gold”, the answer is pretty simple – YES. For those of you wondering, “should I buy gold now that it is over $1900, or should I wait?”, the answer is – THAT DEPENDS. Gold continues to push higher because of fundamentals – it is a commodity and all commodities are going to be rising in dollar terms for as long as central banks try to inflate their way out of debt.

If you want a little “better” price on your gold purchases, (and gold is technically overbought at the moment, which implies a coming correction), a good entry point is on any pullback to a prior support level. At this date, we had a brief pullback two weeks ago to the mid $1700′s before rocketing back up to near $1900. If you want to find a good entry point, select price levels that appear to provide support.

There are two kinds of support – absolute price support and relative chart support. Absolute price support means that a particular price point – say for example $1700 – has historically provided support. The simplest way to identify absolute price support is to look at a chart. Wherever you see the price chart fall down to a particular point and then reverse back up – that’s support. The support is stronger if the reversal has happened on more than one occasion.

The other kind of support – chart support – is more ambiguous. This kind of support can be seen with technical indicators like moving averages or price bands. (Here’s an example from 2008.) There is no “right” moving average and no “right” price band – these are purely subjective indicators, but – in spite of their subjective nature, can still provide fairly reliable entry points. If you look at a chart of gold over the last ten years, you’ll see it’s general trend is up, but that it is marked by pullbacks. Often, those “support” levels you see on the chart will coincide with moving averages. Try looking at a 20day, 50day and 200 day moving average of Gold’s price and you’ll like see support. (There is nothing magic about these levels, by the way. You can pick any number you want – try a 14 day, 37 day and 83 day moving average just for grins and giggles.)

Whatever your entry point, you should find a way to buy gold because the fundamentals support it: central banks are destroying the value of their currencies, and that action in turn means that all commodities will rise in value relative to those currencies.

Finally, a word about the various ways to own gold.  Buy physical gold, not an ETF such as GLD. If you buy futures contracts, take physical delivery. Buy one ounce coins or tenth-ounce coins or even kilo bars, but buy physical.