Sunday, December 06, 2009

so you own some gold stocks?

maybe gold stocks will become the next boom. who knows? is gold mining the path to wealth via speculation? I don't know. I just want to make a point about political risk here.

the world is moving, inexorably, to a gold standard. but not exactly willingly, happily, or easily. the disruption this process will entail is hard to predict, or even imagine. the world will more likely be thrown violently onto a gold standard, complete with mercantilist trade principals – enforced with arms. the reason we are moving inexorably to a gold standard is that we are losing our dollar: the key currency that stitches globalized trade together. we are losing it, it is disintegrating, rotting and crumbling. and when it is gone, then fiat currency itself will be gone.

it is not like we will gain a wonderful stable monetary base – mostly we'll just gain poverty. think of what we will be losing: we'll lose our freedom to travel internationally, freedom to buy imported goods, freedom to buy on credit (these things will be virtually banned). if we american are lucky we'll retain our constitution, but not much else. we will slowly re-build our manufacturing base, and try to make the things we need, instead of buying them on credit and fake money.

but think of Mexico (as just one of numerous examples). how will Mexico deal with the loss of their oil revenue? (in case you have not heard: due to depletion Mexico will soon no longer be exporting oil, and they will also have to end domestic subsidies on fuel.) Either the Mexican government will retain control by authoritarian decrees, or the government will all but collapse under assault from drug cartels and their warlords. These are the two possible outcomes from the unrest that will result in Mexico City when the government is broke, and no international aid is available to save them.

to get back to the gold mines.. Mexico has significant mineral wealth and a developed mining industry. a mining industry that goes back many centuries. they are going to keep mining. but who will control that wealth? maybe the Mexican government, through nationalization. maybe a regional warlord will take control of certain mines. it won't be through any fair process, not democratic, not environmentally sound, and not without violence, and not traded freely on a stock exchange. and if anyone thinks the profits from gold mining will leave Mexico and find their way to the brokerage accounts of americans, they're nuts.

what about Australian gold stocks (to use one more typical example)? Australia won't slide into authoritarianism, not fractional violence. but I still don't think the profits, nor the specie, will find its way to America. it will go to China. the Chinese will be putting up the capital, once the United States Federal Reserve Notes disintegrate like so many leaves on the ground in November. the Chinese will own most of what portion of the global mining industry is not nationalized and guarded. gold bars will be shipped to Shanghai vaults, not London, New York or Toronto.


Anonymous said...

AU isn't coming into fashion, it's always been in fashion. Isn't it odd that something that doesn't cure disease (it can treat certain things) or feed hungry animals has been and is revered the world over. The not-so-mighty dollar hasn't been off the gold standard all that long - proving that every sailing vessel should have an anchor. USA has lost more than it's anchor.

NeonTetra said...

agreed. to use a related metaphor, I see gold more like a sailboat's ballast keel than an anchor. gold doesn't tie the economy down, but it does steady the economy in a storm.