Last week, an extraordinary thing happened in Washington that you should know about.
US Federal Reserve Chairman Ben Bernanke, who is convinced he can beat the recession by creating more debt and printing more dollars out of thin air, admitted to a Congressional Committee: “I don’t fully understand the movements in the gold price.”
Gold, he said: “is out there doing something different from the rest of the commodity group…
“I do think there’s a great deal of uncertainty and anxiety in financial markets right now. And some people believe that holding gold will be a hedge against the fact that they view many other investments as being risky and hard to predict at this point.”
The Chairman of the Federal Reserve, whose actions in the past several years have been instrumental in fuelling the greatest credit and debt crisis in the history of the modern world, still does not realise that gold is not just another ‘commodity’ like iron or coal.
Gold, which has risen from just under $300 an ounce in 1999 to over $1,220 an ounce is regaining its position in the minds of ordinary people as well as big money managers.
Unlike Mr Bernanke, the people who are divesting themselves of the risky assets he refers to – property, shares and the US dollar and other fiat currencies – are doing so because of the continuing intervention and manipulation by governments and central bankers in these markets.
No one knows their true price anymore because of the way insolvent private companies and whole sectors have been bailed out by government instead of letting nature have its way and those companies close in order for solvent ones to take their place.
The government has sucked up so much of the available capital (and created more out of thin air) that the correction is being postponed and the pain extended, including the debasing of the currency.
The price of gold, as a result, has soared.
As I have been writing for some time, ordinary people know that the game is up. They have thrown in the towel and have stopped borrowing and spending.
Instead, they are paying off their debts, are savings their money and rebuilding their personal balance sheets. They are learning (or being forced) to live not just within their means, but below their means.
Commentators who I respect including Bill Bonner, John Stepak, Eddie Hobbs and Karl Deeter are all recommending that their clients buy some gold.
The price of gold, they say, will keep going up.
It will remain volatile as institutional and professional investors, who are deeply concerned about the medium term ability of eurozone countries to pay their debts and the ability of the euro to survive, keep adding to their gold position.
They predict that the price will remain volatile as traders sell at peaks to lock in gains and so recommend that their readers buy gold on the dips, but that they keep buying.
It isn’t just your holdings of paper currency that at are risk from ‘The Great Correction’ as this group of insightful commentators prefer to describe the global recession.
Mistakes in the pricing of all sorts of things – property, companies, bonds and even inflated wages and government overspending – must all be corrected before the economic crisis ends.
This is already happening all over the western world. The gap between our way of life and that of emerging economies will continue to narrow as capital, production and wealth creation shifts from west to east.
Over the past year, the price of an ounce of gold has risen 28 per cent against the euro; over the past decade it has risen by 300 per cent.
The euro since the start of this year is down 20 per cent against the dollar, which in turn, over the decade is down 40 per cent against a basket of other international paper currencies.
Should ordinary people with savings in the bank be worried? I think so.
They should own some gold, ideally some of it in coin or bullion form.
After all, why do we prefer to own our own homes, mortgage-free, rather than rent? Because it provides a sense of security.
There is no third party risk – a landlord who can raise the rent or kick you out – if you own your own home.
For the same reason – security and third party risk, this time in the form of governments that can devalue or debase the paper currency – you should own precious metal that cannot be debased.
The price of gold will go up and down in the marketplace, but its physical presence is immutable. Over the millennia it has held its spending value like no other form of money.