I must give the gold bugs their due. History is replete with governments that inflated their currency and citizen's wealth into nothing by reducing the percentage of gold and silver in their coins or with printing presses. It was Greenspan [2] and the FED who blew up the bubble that got us into our current fix, just as the FED bubbled the economy in the 1920's and then kept deflating the economy over and over in the 1930's. I must give credit to Bernanke; he is not making the mistakes of the 1930's FED. He inherited the mess from Ayn Rand's faithful followers, Alan Greenspan, the Wall Street Journal, et. al. This time, it is Ayn Rand religiously fanatical disciples: the capitalists, Republicans, Libertarians, and Tea Partiers.
You could not use 100% gold backed certificates in place of fiat money since there is not enough gold in the world, even at its current price (which is falling as I write). What would you buy gold with since you are replacing fiat currency that nobody would want? Only the people with gold already would have any money. The gold salesmen/current holders are claiming we can go to a currency based on a percentage of gold. That is lipstick on a pig, fiat money tarted up. The-powers-that-be can just change the percentage of gold as the kings of old did in their coins.
What about supply and demand, the real basis for prices outside of speculators who have driven the price up temporarily as they did in previous bubbles? While investors accounted for 35% of gold consumption in the first half of this year, that was a decline of 23% from last year. 53% of gold production is going into jewelry and 12 - % into technological uses. Overall, second quarter 2011 demand was down 17%. That does not bode well for the bubble. There was "healthy" growth in jewelry for the first six months, but this may be suppliers buying now in anticipation of higher prices for their season, the end of the year when their demand spikes prices. There were "modest" gains in technology. Dental demand was down 12%, substitute materials pushing gold out like substitute materials pushed silver out of photography. This material switch can be anticipated to occur with gold for all technological uses; as the price rises, users will find alternatives. The surging economies of India and China account for 52% of global bar and coin investment, 55% of jewelry demand. They are not rich people. They may sell to take some profits. If their economies sputter, so will their consumption. 69.4 tons were purchased by central banks, which can just as easily sell it to burst the bubble if it threatens their currency. [3]
People have been proven to be bubble-headed by history. Americans seem to have the most bubbles. To name a few, there has been the 1920's and other stock market bubbles, the Florida land bubble, the new-issue stock bubble, the savings and loan real estate bubble, the dot com bubble, the mortgage bubble, 1980 gold and silver bubble, and now we have the current gold bubble. I'm not saying you should get completely out of gold now. You may be able to ride this bubble to greater wealth until it starts to collapse (which may be happening now). But who knows when that will be exactly? The gold bugs were wrong on when this bubble would start. They have been predicting the end of fiat money for over half a century. They will be wrong on the end of this bubble just like they were wrong on the end of the one in 1980. My father taught me to sell half when you double your money (I did); then you are still in the game and all your gold is profit. He also taught me that you never go broke taking a profit. "The bulls get some, the bears get some, and the hogs get slaughtered." My advice is to sell half or at least a large part to cover your costs and pay off your mortgage. Paying off the mortgage on your home is always your best investment. Look what happened to all the home owners who squandered their equity in the mortgage/housing bubble. Sell more parts along the way and be ready to pull the rip cord and take far less than the top dollar for the remainder because when it collapses, it will be fast and furious, like it always is.
Finally, what is the end game? As I said before, you can't eat it, drink it, drive it, or live in it, nor does it pay interest. Gold is not legal tender. Governments will undoubtedly, legally prevent it from becoming legal tender. If fiat money is to become more and more worthless, how do you take your profit? What do you get in exchange for your gold? Gold is just a shiny stone that mesmerizes the naive natives.
Please see my music video on the crisis, "Everything is workin' (So Why Aren't We?), a parody of Bob Dylan's, "Everything is Broken". It rocks! (Of course, I am prejudiced)
Gold a "bubble that could deflate," says analyst
Richard Russell - Expect Mass Entry Into Gold By Retail Public
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