In my view, speculating in paper these days is extremely dangerous. In fact, I believe that over the coming years, hard assets will prove far preferable.
There was a contributor to several economics sites a while back whose screen name was Two Short Planks, and he produced what I consider to be an excellent summary analysis and warning on this very topic. Here it is:
“Over the last few months I’ve tried to nail-down an underlying reality, a meaning, the ‘nature’, of both physical Gold and Fiat Currencies. Neither are obvious to the average person, and there are many, many versions as to what they both are, depending upon which camp you are in (Trader, Economist, Politician, PM Bug, Investor, Mum & Dad, Business Owner, Banker, Wanker, Central Planner, etc, etc).
My reasoning for trying to identify this is simple; I have not been overly comfortable with what the majority of people on this forum, as well as other sectors, have declared them to be.
Not knowing the true nature of Gold and Currencies manifests into a failure to understand the relationships both have in the real world. Add to that a deficiency in understanding them as a financial tool and/or investment.
I would like to share with you what I’ve come up with…and I’ve kept them simple.
CAVEAT: I refer to currencies in a general sense, not one in particular, and not one in relation to another. I do not refer to any Gold Derivatives.
Fiat Currencies are Derivatives
. Since the abolition of the Gold Standard, Fiat Currencies have become a Derivative; as they are traded in the open market they point to an economy of origin, they point to that country’s Bond and Treasury Bills, and they point to the ‘Balance Sheet’ of that country’s Central Bank. Destroy the Bonds, Treasuries, Economy or Balance Sheet and you destroy the Fiat Currency as well. This was not necessarily the case when Currencies were backed by Gold and/or conformed to a Gold Standard, as the underlying value was preserved within the physical Gold…Currencies were indeed a ‘Claim Cheque’.
Gold has two lives (Dr Jekyll and Mr Hyde); it spends most of its live as perpetual Commodity, but every now and then it becomes ‘Flux Money’. We all know its Dr Jekyll manifestation as a metal and traded commodity, so there’s no need to elaborate on that. In its Mr Hyde manifestation (Flux Money) it phases in and out of favour throughout history under certain conditions. When things are going well Gold is almost hated for its lack of return performance and cost of storage, but when things deteriorate, that's when Gold comes out of psychological hiding. When wealth moves into Gold for safety, by virtue of its demand, it becomes the vessel of choice. Once this starts to happen, a bottle-neck appears as more and more wealth converges upon a finite Gold supply. Demand forces the value of Gold upward and this is precisely when Gold recaptures its reputation and all of the ill feelings as a non-returning commodity are forgiven. I believe the reason Gold has this ability, this power, is simple; it’s etched into the psyche of every society since every society has historically been through dark times. Also, as the saying goes “there no such thing as an atheist in a fox hole”, well, there’s no such thing as a Paper Bug in a [global] Collapse, whether that be Deflation, hyperinflation or societal.
In simple terms, Currencies are derivatives which relate to the modern economy, and Gold is both a permanent commodity and occasional safe storage.
If you can relate to this, then you can proceed with the $64,000 question; where are Currencies going and where is Gold going?
So really, the answer to this question - since currencies are a derivative - relates directly to the actions of Central Banks, Government Treasuries, and Global Consumers.
And what are we seeing? Central Bank balance sheet expansion, Government Treasury Ponzi schemes, and a protracted contraction of Global Consumption.
If you believe Central Banks will keep printing, Governments will keep Deficit Spending, and Global Consumers are on the edge, then Gold will come out of flux and solidify back into money once again.
Those who defy their intuition, those who defy the psyche of the market, will burn in a paper bonfire, should the current path be defended and this erosion continue.”
