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THE
ROCKET SCHOOL OF ECONOMICS


What to Say?
by Professor von Braun

September 30th, 2001

Given the events of September 11th and the resulting financial turmoil it is difficult to grasp the significance of what took place. The horrific loss of life as a result of these attacks is beyond belief. That human beings could plan and carry out such attacks in the name of religion is also beyond belief. However, unfortunately, the attacks did happen.

It would be surprising to learn as to how many players in the financial paper asset game did not suffer losses to one degree or another. The swiftness of the attack and the damage done to world financial markets did, I suspect, catch many participants by surprise.

The fragility of these markets was exposed by this event, a fragility that was already present at the time and continues to be present. Trading was halted, or reduced, orders were difficult to place and even harder to execute and losses were increased.

One of the more "sobering" aspects of these attacks is the notion that investors really do need to take a look at what they own and describe as assets. Real assets that is, assets that can be turned into cash when and as needed.

There is no doubt that people seem to be confused about this definition. Financial assets today are for most people a very confusing subject and most investors do not understand the complexity of today's financial markets, nor do they understand the concept of derivatives and their common usage.

Real estate should not be regarded as an asset. It is a necessity, having a place to live and conduct business from is an integral part of our way of life. But unless it is mortgage-free it is not an asset as the mortgage is owned by a financial institution and that situation will remain until the mortgage is paid. Given the lofty valuations of properties in the US any serious slowdown will impact on these valuations and as demonstrated in the Nasdaq over the last two years, what goes up can come down just as quickly.

Stocks are not an asset. What do you actually own when you own stocks? A piece of paper with your name on it is all you own. The value of these pieces of paper can fluctuate wildly as we have seen recently. Like real estate, stocks require a willing buyer for them to retain value and when the buyers disappear so to does the value of ones piece of paper.

Bonds may be safer but they also are subject to the ability of the issuer to pay both the interest and redeem the bond when the time comes. How can a debt instrument really be an asset? Why did the issuer raise the bond in the first place? Was business that bad that a large source of capital was required to keep things moving? Certainly it seems that "junk" bonds are now beginning to live up to their name.

Any and all investments that are classified by the investor, as assets really do need to be examined afresh given the events of 9/11. A more stringent criteria needs to be applied and the quality of the party on the other side of the transaction looked at very closely. One also needs to look at the quality of the market itself. Are you playing in a market that is currently the subject of over valuation? Where are the buyers going to come from, the very buyers you will require to allow you to convert your asset into cash if and when needed? Or, if you are relying on interest payments for income, what is the quality of the party making these payments? Certainly the utilities market, a traditional safe haven, has had it's ups and downs over the past two years.

Then there is the issue of cash. Holding cash is a strategy recommended by many so-called prudent advisors, but what is the value of cash? In this day and age cash has nothing whatsoever to back it up, other than a willingness of some party to hold it as an asset in preference to some other form of cash. Certainly the Swiss Franc is unlikely to tumble, but the US dollar; well there is a currency that is getting tired. What would happen if the rest of the world decided to not hold US-based "assets". Should the US dollar depreciate by 20% in a short period of time your cash holdings have declined accordingly. Can't happen? Well it has happened several times over the last few years. Not in the US dollar, but try the Russian ruble, the Thai Baht, the Australian dollar, the New Zealand dollar etc, etc.

As for the number of internet-based investment-oriented websites that are designed to receive their incomes from either subscriptions or advertising revenue -- and are wildly recommending buying gold stocks -- we say be very careful of these wild claims and the rationale behind them. Gold stocks are no different from any other stocks and should not be regarded, in light of the current gold market, as a safe haven investment. The gold mining industry itself is in a state of disarray and it will be several years before it becomes remotely healthy. That's apart from the fact that the entire worldwide gold stock capitalization is quite small and could become overvalued very quickly.

We have stated in these articles before that now is the time to be buying physical gold, providing you take delivery of your purchase. The current gold market is a paper market powered by computer-based risk programs that track every move in the gold price. Should gold move too far in any given direction more futures contracts are added to re-establish the desired direction. Supply and demand does not apply to this market at present and has not applied for several years. This situation won't change over night. In fact it won't change until the trillion dollar derivatives market suffers some major setbacks and we have not seen any serious setbacks yet.

What the current gold market does create is the buying opportunity of the century when it comes to physical metal, providing you take delivery.

What are you buying when you buy gold? You are buying an instrument that does not have a liability attached to it. It is what it is and is not dependant upon consumer spending, government spending, debt, interest payments, CNBC, or anything else for it to retain its inherent wealth. Ten ounces of gold will always be 10 ounces of gold, regardless of the price.

This is what needs to be understood when it comes to re-evaluating ones portfolio. What do you really own that has an inherent value that won't disappear over time, that is not dependant upon something outside of your control for its value to either increase or diminish?

The choices are limited and gold and to a lesser degree, silver fit that category. At these price levels one should not be complaining, rather, one should be adopting a buy and hold strategy -- in the true sense of the term.


The Prof can be contacted by email at profvonb2@aol.com

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

Return to the The Gilded Opinion Index Page

The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs


  • The commentary/opinions offered by all guests at this venue are expressly their own and do not necessarily represent the views of the management or staff of USAGOLD - Centennial Precious Metals.

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