Thursday, May 3, 2012

Gold Pays No Interest. So What?

One of the best reasons not to own gold is that it pays no interest.

This the argument from some of the greatest financial minds, including the Oracle or Omaha, Warren Buffett. So if multi-billionaires say it, we must listen or be damned.

However.

Bill Gates said Windows would reduce the cost of business and Steve Jobs said Apple Computers didn't get viruses. So perhaps billionaires can get it wrong, especailly when they are book-pumping?

Firstly, neither does a bank note pay interest, unless it is put to work as a capital investment. One of the reasons why most central bank interest rates are close to zero is that they don't want money to be left in their vaults. They want it to be out there in the economy, being used as capital investment. They want money to move, to be used. If it's not, there is no incentive or reason to charge interest.

Secondly, you can 'lend' out your gold, using it as collateral for a loan to someone else. Just ask the Goldsmiths of old who figured out that the financiers depositing their gold with them didn't come back that often wanting to take out their gold. So they leveraged up the gold they had in custody by lending out gold they didn't own and represented this with paper certificates. Exactly the same as Banks do today with your fiat money. Only there's no gold backing or much collateral for that. Maybe around 5% only.

Thirdly, look at the example in Vietnam's banking system. The 'Dong' (the Vietnamese monetary unit) is so devalued that Banks there will 'pay' you interest on your gold if you store it with them. So much for the income producing qualities of a currency when it goes pear-shaped.

Lastly, there is this article which I will just point you to. It's a complex reason, but here is a summary; "Gold can offer a money market return regardless of its price trajectory. Spreads between gold futures' delivery months, in fact, implicitly reflect short-term rate expectations. The gold market, through cash-and-carry operations, tells us what traders think short-term rates ought to be."

So gold may not earn interest as we know it, but it also is not a risky asset. Note that, over time, the price increase in gold has more than matched the returns from interest.

After all, perhaps those wanting to sell you alternate investments that are ripe to be foistered on the unaware investor, will always spout such arguments against gold. They want as many fiat money fools as possible to jump into their ponzi schemes before its inevitable crash. Property perhaps?

Sure, you can place gold on a table and look at it and it doesn't grow all by itself (I wish). But the same with cash. One has to 'put it to work' and risk those savings to make a return. To say you can't put gold to work and create a return is not correct.

Gold in New Zealand dollars: $2045.14 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $37.91 per oz
Previous all-time high: $59.19
per oz (30 Apr, 2011)
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