I had a strange dream the other night. I dreamed that I was an archeologist and came upon a three thousand year old tomb in Egypt. In the two rooms of this tomb were stacks of assets. One stack consisted of bricks bearing hieroglyphics that stated, when translated, that the bearer was entitled to a 4 percent annual interest rate backed by the Bank of Necropolis and the full faith and credit of the government of Pharaoh Rames II. The other stack was gold bars.
The brick bonds had great historical value and would be treasured by a few museums and some very rich collectors. But they would have no value to other folks. The gold bars, on the other hand, would be worth a fortune to everyone because gold’s value, while it may vary greatly from time to time, is always, will always, be significant.
Which brings us to the price of gold today. It’s on a tear. A decade of so back, when some know-it-all economist advised governments to dump the metal in favor of better paying assets like Treasury bonds, gold was selling for as low as $270 an ounce and long-term U.S. bonds were paying 6 or 7 percent interest. Today, gold is about $1,350 an ounce and a 10-year Treasury bond is paying a measly 2.4 percent or so.
So what’s the lesson of my kinky dream and the recent gyrations of he price of gold? Buy more of the metal now? Maybe. Maybe not.
The real lesson here, the scary lesson, is that some assets always have real value, while others are simply based on the credibility of their holders or issuers. The U.S. government these days is creating new money at an incredible pace in various ways at the same time that the U.S. economy isn’t growing hardly at all. Ben Bernanke and company are only getting away with this spasm because most of the other major central banks are doing the same thing and their economies are as deep in the tank as our own.
There are all kinds of reasons why this can’t continue much longer. Which brings to mind the question: Will archeologists of the future come upon a buried vault containing huge stacks of U.S. debt paper in one room, and gold bricks in the other. And will they wonder if the paper is worth saving for museums or better used to cook their evening dinner.
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