Why people are buying gold

Dec 1, 2010

London, England

What a beautiful city! We're talking about London. It was all dressed up for Christmas last night. And we got to see quite a bit of it. Student protestors blocked the streets around Trafalgar Square....and there was so much snow and ice... taxis must have stayed home. We walked from Mayfair to Southwark, using one of the pedestrian bridges to get over the river.

------------------------------ Don't Miss ------------------------------
FREE Webinar - Is Now The Right Time To Buy Gold?
Our Guest: Bill Bonner, Publisher & Editor, The Daily Reckoning
Got a question for Bill? Register before 3rd December! Click here!

It was snowing - large flakes floated down and settled on the sidewalks. There were Christmas trees and toys in the shop windows...along with the usual fashions, paintings and jewelry. People gathered in warm pubs and cafes to escape the cold; they looked so inviting, we wanted to stop in each one and have a drink. The Royal Festival Hall was brightly lit up...as were all the major buildings along the Thames.

We've never seen it so lovely. Too bad we're leaving town this morning...on our way to Mumbai (aka Bombay.)

Uh oh...what's this? Gatwick Airport is closed. Our flight is delayed. Well...more time to reckon!

But what are we reckoning with...oh yes... money. Alas, the world of money looks much less attractive than the world outside our snow-bound window. In fact, it is downright ugly.

The stock market seems to be rolling over. Yesterday, the Dow fell 46 points, not enough to make much of a difference.

Gold rose $18.

Here's what we see - Big Risks/Little Rewards. That is probably what gold market buyers see too.

You'd expect gold to rise when there is consumer price inflation. And there is quite a bit of it. But not in the US nor in most of the developed countries.

Maybe some people are buying gold to protect themselves from inflation, but it looks to us as though they are buying it for another reason - because they are fearful that something is going to go wrong.

Right now, world financial authorities have a number of balls in the air - China's property bubble...its excess capital investment...its rising inflation; Europe's collapsing bank debt...the euro...government funding problems; America's continued housing decline...high unemployment...overpriced stocks and bonds...Ben Bernanke and QEII.

Gold market investors are betting that the authorities are going to drop one of these balls. Maybe more.

Remember, these are the same klutzes who saw no trouble coming...and then misunderstood it when it arrived...and made things worse.

And in Europe alone, they will need more than two hands. Here's the latest from the Telegraph:

"Contagion strike Italy as Ireland bailout fails to calm markets."

"It was the worst single day in Mediterranean markets since the launch of monetary union ," writes Ambrose Evans-Pritchard,

"Spreads on Italian and Belgian bonds jumped to a post-EMU high as the sell-off moved beyond the battered trio of Ireland, Portugal, and Spain, raising concerns that the crisis could start to turn systemic. It was the worst single day in Mediterranean markets since the launch of monetary union."

"The euro fell sharply to a two-month low of 1.3064 against the dollar, while bourses slid across the world. The FTSE 100 fell almost 118 points to 5,550, while the Dow was off 120 points in early trading. "

"The crisis is intensifying and worsening," said Nick Matthews, a credit expert at RBS. "Bond purchases by the European Central Bank are the only anti-contagion weapon left. It needs to act much more aggressively."

*** Meanwhile, in Ireland, the public mood is turning as dark as December.

Irish voters are threatening to turn away the rescue boats and instead throw the bankers overboard. The Telegraph report continues:

"One poll suggested a majority of Irish voters favour default on Ireland's bank debt. Popular fury raises the "political risk" that a new government elected next year will turn its back on the deal."

"Premier Brian Cowen said there was no other option. "We are not an irresponsible country, " he said, adding that Brussels had squashed any idea of haircuts on senior debt. Irish ministers say privately that Ireland is being forced to hold the line to prevent a pan-European bank run.

"There is bitterness over the EU-IMF loan rate of 5.8pc, which may be too high to allow Ireland to claw its way out of a debt trap. Interest payments will reach a quarter of total revenues by 2014. Moody's says the average trigger for default in recent history worldwide has been 22pc. "

*** If Ireland shirks its debt load, others will too. And then, the euro will collapse. (It fell below $1.30 yesterday.) And if the euro goes...so does world trade. And if world trade collapses so does the US stock market and the US economy.

And remember, that's just one of the risks. There are more.

So what should you do?

Easy. Buy gold on dips. Sell stocks on rallies. Don't worry. Be happy.

*** "Should I buy farmland," asks a Dear Reader.

Answer: yes and no.

There. Always trying to be helpful. Farmland has been a great investment for many years. But yields - from renting out farmland - are near record lows. This suggests that capital gains will be low over the years ahead. There's a time for every purpose under heaven; this is probably not the best time to buy farmland.

On the other hand, farmland isn't going away. And over the long-term it is likely to hold its value...and perhaps increase. Here's a report sent to us yesterday from the heartland of the homeland:

"(Globe Gazette) - Mark Newman of Forest City has been an auctioneer for farmland auctions since 1981, but never has it been as exciting as it is now. "

"The atmosphere is just electric," said Newman referring to public auctions. "It's fantastically exciting for buyers and sellers."

"The current market for farmland is exciting because farmland values have gone up at least 13 percent in Iowa since October 2009, according to a recent survey by the Federal Reserve Bank of Chicago."

"Specifically in the North Iowa area farmland values are up 11 percent, with the western part of the area seeing a 17 percent increase, according to the report. "

"I think we could safely say that report from the Chicago Bank is pretty indicative of what's happening here in North Iowa," said Sterling Young, farm manager and farm real estate broker with Hertz Farm Management Inc., Mason City. "

"Farmland prices in North Iowa have ranged from $3,000 an acre for poorer land and up to $7,000 an acre for really good land, said Young, Newman and Fred Greder, owner of Benchmark Agribusiness, Mason City. Average farmland has been in the middle at around $5,000 an acre, the three men said. "

"Farmland values in Iowa declined for the first time in 2009, according to an annual survey released by Iowa State University Extension in December 2009. "

"However, it began to rally at the end of 2009 and has been doing so since then, Greder said. "

"The rally began because there wasn't very much land for sale and investors were looking to land as a more stable investment, he said."

"People that have cash are finding CDs and savings account interest rates aren't strong," Young said. "The return from land investments is better. They feel more comfortable with placing it there."

Farmland values have also gone up because of commodity prices.

"It really started to take off mid summer 2010, and it's not a coincidence it's at the same time the grain prices started to go up," Greder said. "I've always been surprised that the long-term investments like land is so responsive to grain prices."

"North Iowa sellers have definitely decided to take advantage of the higher prices."

"There have been quite a few auctions and quite a few yet to come before the end of the year," Greder said.

"Newman, an auctioneer and attorney at Newman Law Office PC, Forest City, agreed and said there is a big push right now not only because of the prices but because capital gain tax rates are expected to increase next year."

"For some of those sales we have significant penalties if they fail to close by the end of the year," he said. "It can mean $15,000 on a somewhat typical farm or $20,000 on a better farm if it closes after Jan. 1."

"While many people are pushing to sell yet this year to avoid higher capital gain tax rates, farmland values might increase even more next year. "

"I think the best is yet to come," Newman said.

"His reasoning is that more people will hold onto their land because of higher capital gain tax rates, which will create a shortage in land and drive up the prices."

However, as Newman admitted, it's always hard to know what the markets will do.

"Then again I don't have that crystal ball," he said.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Why people are buying gold". Click here!