Friday, October 23, 2009

Can biting a Greenback today tell you if it has value?

In the 1800’s gold coins were used as currency instead of paper. People used their teeth to bite into the coin to see if it was real. Paper money from the Federal Government didn’t get started until the Civil War. The dollars nickname of “green backs” was created then because of the green ink used to print the money. Some people today believe that inflation in terms of currency started with the printing of the first “green backs”

Recently I was asked about the purchase of gold bullion, at these levels ,as a hedge against future inflation. I thought about the question a little while and then responded. I asked if the local Safeway would take gold in payment of the supermarket bill at the checkout? Another question was how would you make your car payment, house payment and utilities that are due each month? The response was, I'll just sell some of my gold and convert it to dollars then I’ll have the cash to pay my bills.

I suggested that if you take what they call in the gold trading business, Physical Deliver, of the gold, in order to sell it back the buyer they may want the metal assayed which costs money. I also suggested that they call one of the advertisements we all see on TV and ask the price to buy and the price to sell it back to them. The difference between the price you buy and the price you sell is the spread. If the spread is greater than 3.5% then you are probably being ripped off.

If you were to buy gold at $1,058 and wanted to sell it your dealer fee would be 3.5% of the current market of $1,058 or $37.00. In order to break even when you sell then you would need the price of gold to be, assuming a 3.5% dealer fee $1,095. You may also have to pay an assay fee in addition to the dealer fee, which would increase the price you would need to break even.

I asked were there any other reasons beyond inflation why they wanted to own Gold? The answer was, “I think things could get very bad again and I think gold can afforded me some protection if things do get bad economically in the United States.” So, what this person was concerned about was that America would get into trouble again and the rest of the world would be OK.

While gold is getting a great deal of press, the decline of the dollar is helping feed the marketing of buying gold. I have seen several articles about OPEC wanting to switch to a different currency than the dollar for the payment of crude oil. I do not know of any currency in the world that has the size and liquidity to handle the world’s commerce including the Euro. Over the last three and one half decades I have heard many times the idea of replacing the dollar with a basket of currencies and every time there is an economic or political problem in the world money runs to the dollar.

Ask your self this question? If the world’s economies are in such great shape then why is the yield on the 90-Day T-Bill 4 basis points? The answer is that enough people are concerned about the global economic prospects that they are willing to keep $3.5 trillion dollars earning almost zero return in money market funds.

If you buy gold then as the saying goes, “Let the buyer beware”, and make sure you have enough greenbacks laying around just in case.

Dan Perkins

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