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Why is gold for protection?

*Dow Theory Letters, by Richard Russell, February 25, 2008

Over the last eight years the Dollar Index has lost 36.5% of its value. This is creating problems. One problem is that due to our current account and trade deficits, the rest of the world has built up a huge store of US dollars. These dollars are considered part of each nation’s reserves. But our creditors are starting to look on their dollar reserves with a sense of foreboding. This is because the value of their dollar reserves are going down and down and down.

What can they do? One answer is the Sovereign Wealth Fund. A nation puts billions of dollars into a special fund, and then the fund buys assets with its hoard of dollars. The total value of the Sovereigns Wealth Funds is exploding. These funds now hold about 3.2 trillion dollars worth of currencies, most of it in dollars. As the US economy weakens (probably not a recession yet) the Sovereign Funds are having a picnic. They’re picking up US assets at bargain prices.”

“OK, let’s get back to what you and I can do about the current tenuous situation. I’ve suggested that my subscribers, own gold, cash and a paid-up home. Gold is for protection against today’s galloping inflation. Cash is for transactions, we buy and sell things with cash. With dollars I can buy gold or diamonds or real estate or a loaf of bread or a dinner at my favorite restaurant. So don’t look down on cash. Just don’t have all your assets in cash. As for the mortgage-free home, that’s your palace, that’s where you live. As long as you pay your taxes, that home is yours. A paid-up home is your castle. A home that you love is a tremendous emotional comfort. Remember, man does not live by bread alone.

Many (I hope most) of my subscribers hold various quantities of gold. And from what I gather, most of you are hoping to see gold at two thousand or three thousand an ounce. But wait a moment, and be careful what you wish for — three thousand dollar gold goes along with bread at ten dollars a loaf and a ticket to a movie at $25 a shot and martinis at your favorite bar at $14 a piece. We don’t own gold to make a killing, we own gold so that inflation doesn’t kill us.”


*This information is solely a highlight of the opinion of a third-party publication and is incomplete.  Please subscribe to this publication for the full and timely opinion of the author and call a Monex Account Representative for any additional up-to-date information. This is not an offer to buy or sell precious metals. Investors should obtain advice based on their own individual circumstances and understand the risk before making any investment decision.

Aftershock Investor