Added by on 2009-03-20

John Reade, chief metals strategist for UBS noted disconcerting tone in saying “this gold rally is driven by safe-haven fears, and has a very different feel from the bull market we’ve had for the past eight years.” The entire premise of Gold, a metal that would require mule trains, guards and railcars to transport significant wealth is comical.

Fiat currencies are all worthless when you get down to it, but people need a means of exchange and the truth is there’s no way to hedge against any risk. If the entire world economy collapses and China comes to collect moneys owed, I don’t think a single expert believes that a window somewhere would open and any item of value would be paid out.

That’s the problem really. The Chinese have surpluses or cash inflows from the inexpensive labor they provide, but have no safety or confidence in the likelihood that communist rulers will give capitalists free, unfettered access to investments in their country, so they invest abroad. Every beautiful woman in the world of nations has a fake leg, glass eye, push up bra or a wig. Each incredible strength is offset by some weakness or weaknesses that render that advantage away.

Diamonds are a great way to insulate wealth. They’re small, portable, don’t set off metal detectors and a small bag of them can contain a hundred million dollars in value or more. A billionaire with a bad back can carry a billion dollars worth of diamonds (it’s Bid Laden’s bank of choice). It’s easy, however for an expert to “beat” a neophyte, so trust in the value is not easy to determine. Imagine the fear you feel when you walk into the diamond district to buy a stone. You have no idea what D, E or F color looks like, or the difference between vvs and si2.

Oil is better than gold as a wealth hedge. It’s a useful industrial material with a growing requirement as population grows. You can sell oil in any currency and live well, as oil tends to move inversely with currencies, providing some synthetic and real hedges against economic issues. Gold is pretty, but heavy to carry and has an intellectual history as a hedge against the perils that have occurred throughout history.

I guess Nickel, Copper or Tin would make good hedges also. They’re industrial metals that have practical application always and are for the most part in greater demand due to increasing population. It’s just a silly world where such synthetic hedges are needed, especially physical ones because they are just plain heavy.

I’d advise using a derivative instrument with a matching counter party risk that would enable you to carry the hedged risk in your pocket. Trouble is those things aren’t worth the paper they’re written on these days, much like the currencies we’re worried about in the first place.

Be mindful, be careful and good luck!

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