December 3rd Gold hit an all time high of over $1215 per ounce. Such a high price clearly suggests that the world is going to end tomorrow so no point getting up in the morning. Well, maybe it isn't really that bad, but it is important to understand why the prices are going where they are. Gold is used in 2 primary ways. First it is used as a commodity to make jewelry and other physical things like super conductive wires in microchips. So the price of gold as a commodity goes up during times when companies are making more circuit boards or during Indian Wedding Season (One of the Largest Seasonal changes in Gold Demand). Gold is also used as global store of value in order to hedge against changes in the value of fiat currencies like the US Dollar. The dollar can change in value for any number of reasons but at the heart of the change in value is a change of what people are willing to pay on a micro basis. Once people think the price of anything will go up they are willing to pay more and visa-versa. So attitudes and the conventional wisdom do effect prices in the short and medium run.
So the change in the price of gold does not have a base in a change in the supply or demand of the commodity but in the fact that the US Dollar is weakening and the worry surrounding these changes make Gold more valuable as a store of value. So the real problem is that people are not sure about the direction America is heading. With the uncertainty in the financial and health sectors along with increased regulation in the manufacturing sector and an over all lack of a vision for the country there is little wonder why the dollar may no longer be the worlds sole reserve currency.
So what can be done? In order to get the deficit under control the best solution is to cut entitlement spending and increase taxes. I believe that Americans expect way to much from our government and you may disagree, but giving more and expecting less entitlements would certainly make the country better off. But this is an interesting gap between micro and macro economics because without some aspect of altruism the country will not be able to take out some of the risk associated with dollar moves. The Kennedy Line Rings true to me, ask not what your country can do for you but what you can do for your country.
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5 comments:
Have you seen Stewart and Colbert report on gold in the past week? Because it's hysterical, but also alarming, that they can link rabble-rousers like Glen Beck, who talks about the collapsing economy, then suggests people invest in gold as the only way to stay safe...and then there's Glen Beck appearing in a commercial for GoldLine, telling people to "pray on it" in order to make a decision about their financial investments.
Also, it's time's like this I'm friends with people in finance.
Colbert clip:
http://www.colbertnation.com/the-colbert-report-videos/258566/december-15-2009/prescott-financial-sells-gold--women---sheep
Mcnamme my only advice to you is never run for office on that platform!
I thought to coat hanger ended all political office hopes?
Stephen raises a valid point (also yes, traditionally when people doubt the strength of currency, gold is seen as a wise investment...if everyone is telling you for a year or two that the economy is tetering on a calamity, you'll likely turn to the tried and true...as long as there is some form of economic exchange for goods and services, gold will be valid currency.) But yes, there's the crux of the issue and the inherent contradiction-- people expect some form of benefit or service for their tax dollars and in lieu of that...for less tax to be taken from their income.
This has always been the issue, tax increases can be passed if it's on someone else's head (raise taxes on the wealthy or corporations) but this traditionally harms economic growth and investment. Entitlements should be scaled back...unless you're receiving them. Social Security for example-- when there were rumblings, even in the 1946-48 and 52-54 Congresses (the only times the GOP controlled the House between 1933 and 1994), suggestions of rolling back the New Deal helped result in an electoral bloodbath. If people have been led into the expectation that they will receive this benefit in exchange for their taxes, they will not react kindly to the perceived breach of contract. Argue what you may about fostering altruism in a legislative sense, but that type of sacrifice is seen as a permanent one and therefore more difficult to stomach unless there is a crisis. Even something seemingly more extreme, such as military conscription I think would be easier to digest, as its effects are in theory temporary (your sons are in 2-4 years or until the War ends and then come home), same with effects such as war rationing. Scaling back services permanently while increasing what the government takes from people is probably a far harder sell to make to a society.
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