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The Trouble With Gold

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Here we continue our look at how to cope with the current messy state of the world. The main question I suppose is: what's the ultimate hedge against catastrophe?
We've already dealt with real estate, so obviously the next answer is Gold.

Gold is currently priced a little under $20,000. We are constantly being told it will leap up to $30,000, maybe even $50,000. Sounds great.

Even if it hits $50,000 that will be a triple, which cant be bad.
Bitcoin is currently hovering around $60,000. Supposing that too triples. That would take it to $180,000. I think we'll reach that figure in a year, and a lot more after that. I'm on record as saying we may well hit half a million dollars by 2025. That's more than a ten-fold increase from here.

Not convinced? Best to stick with the good old tried and tested yellow stuff?

Okay, let me tell you a story.

The time is autumn 1987. I am heavily invested in the UK stock market. On the friday before the melt-down my friend Gerry and I sold everything and put our money into gold. We knew bad times we're coming.

On the following monday and all that week we felt rather smug. Stocks were skating their way to the bottom. Gold was holding up rather nicely.

A couple of weeks later Julie and I headed south for the winter. I had no worries. Things were safe. I was heavily into gold. What could go wrong?

By now you must be expecting me to divulge the bad news.

The Canary Isles were a delight. We had a great winter. Worries were left far behind. We enjoyed the food, the lazy days, the fine weather, the dips in the pool.

I didn't bother to check my holdings till I returned to the UK only to find that my gold stocks were down. They hadn't retreated by much, but they were down. Excuse me, but that's unconstitutional. Excuse me, but in times of trouble gold goes up. Excuse me. What went wrong?

I'll tell you what went wrong. Those who were heavily into stocks got caught, and were margin-called. In order to get out of trouble they had to sell the good things to cope with the losses in ordinary stocks, and that pushed the price of gold shares down, and that impacted on the price of the metal itself.

Clever people are wont to tell us that the good thing about holding gold is that there is no counter-party risk. That, of course, is perfectly true. But what that statement fails to take into account is that when the shit hits the fan you need to rush for protection. In order to get that protection you have to sell something. You raid the piggy-bank. And what is in the ultimate piggy-bank? The yellow stuff. So you sell some. But the whole point of holding gold was that you weren't going to sell it. You were hanging onto it as a hedge. It turns out there was a counter-party risk after all, and that counter-party was the person holding the gold. -- Whoops!

Of course, the same could happen to bitcoin. But I think my little story is worth remembering. When the chaos is all around, it is hard to find anything that hangs onto its previous value. And to use whatever that solid stuff is, you have to start selling it to survive.

Ah, but real estate is different.

Oh no it isn't. Of course, you can live a relatively pleasant existence in your lovely home, but try and raise some money by mortgaging it at the end of a financial massacre. The banks and mortgage companies will have closed ranks.

Remember my stories about trying to buy houses in the autumn of 1991 when prices were at giveaway levels? Neither I nor Gerry could get finance. Both of us on at least one occasion got man-handled to the door, because bank staff were at heart-attack level upon hearing the word 'mortgage'.

If you must hold gold, the best way to do so is to buy gold coins. The Royal mint still produces sovereigns. Krugerands are available. Both the USA and Canada mint gold coins. They can be your cash stash-of-last-resort. Get enough to last you for two years of emergency funding.

There is another problem with gold. It's value rests on its scarcity. However, I'm sure you've heard of Psyche-16, which is an asteroid in the asteroid belt beyond Mars.

Already missions go to Mars, almost as a matter of course. The asteroid belt is not that much further. The real problem is that mining an asteroid way out there and getting the goodies back to earth is rather a tall order. But who needs to get the metals back to earth?

Let me set out a perfectly feasible scenario. But first, let me admit this scenario is not likely to come to pass within the next ten years, so its effect on gold will not be felt this time around. But let me just assume that we could achieve what follows in a little more than ten years. Here's the scenario.

These days anyone who is in the space game can land a rocket on an asteroid. Mining it is relatively simple once one can set up a work station. Complicated and costly, but doable even now. The thing is that the real cost of using rockets is the problem of countering the escape velocity needed to exit Earth. Lifting off from the Moon or an asteroid would be simple by comparison. This means setting up a work station and a launch site on the Moon would be a first step to mining asteroids.

Shunting an asteroid the size of Psyche-16 towards Earth orbit is not technically possible. It is however possible to bag up metals and tow them to the Moon. How about setting up safe storage facilities on the moon? But we'd have to extract the metal from the rock. Possible, but one would need to set up a facility to do that, preferably on the asteroid.

However we look at this, the real problem doesn't seem to be finding and mining the metals, but before we do that we'd need to set up an industrial complex on the Moon. There are, of course, plans afoot to do just that. Will such a project come to fruition within ten years? I'm not taking bets, but it does seem possible.

So is gold's reign as the ultimate store of value about to get knocked for six? If within the next ten to twenty years it does indeed become feasible to mine gold on Psyche-16 and tow it back to the Moon, and process it there, then the gold can also be stored there. It will then be possible for the amount of gold in store to sky-rocket. That will play havoc with the value of money, if money is still tied to gold at the time.

Maybe not just yet, but great changes are on the horizon.

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