The first step on the road of communicating in a given language is learning the alphabet. Letters in the alphabet represent sounds. Combining the sounds appropriately results in the formation of words. Words convey meaning. A series of words form a sentence. And a sentence allows for complex expression. Or as Oswald Spengler put it so eloquently, “It is by means of names and numbers that the human understanding obtains power over the world.”
In other words, knowing the ABCs is important.
Michael Kosares has carried this concept over into his book The ABCs of Gold Investing, in which he considers and explains the rudiments of investing in precious metals. As he states in his introduction, his book provides “a basic who, what, when, where, why, and how of private gold ownership.”
The ABCs of Gold Investing is arranged alphabetically. For example, A is for Asset Preservation. B is for Bullion Coins. C is for Choosing a Gold Firm, etc. And although the arrangement is a little different compared to most books, it is very effective. Which means it makes for a pleasant reading experience. An experience that sidesteps the wasteland of another-boring-investment-book and enters the wonderland of learning-can-be-fun-and-profitable.
Each letter illustrates an aspect of investing in gold.
In A is for Asset Preservation, Kosares gives some chilling economic statistics that show just how gooey America’s financial predicament is. In 1970, federal debt was $436 billion. That number metastasized to $7 trillion by the end of 2003. And during the same time frame foreign debt went from “a mere $12.4 million” to “a dizzying $1.5 trillion.” And if that isn’t enough to alarm you, Kosares directs your attention to two other boogeymen: since 1970, there’s been a 490% increase in the consumer price index and taxes have increased “1.5 times faster than income.” After reviewing the status quo, Kosares’ conclusion is simple. “Gold affords humanity precisely what it needs from time to time – the protection of wealth against the most threatening circumstances, not the least of which is the destruction of a nation’s money by its own government.”
The letter H is for The History of Gold since 1971. Gold’s history reflects more than just highs and lows on a price chart. Gold is “a political metal,” according to Kosares. This is quite a statement because it indicates that global economics involves a lot more than simple supply and demand. Politics complicate the mix. What is interesting is that despite its price fluctuations, gold’s trend is relentless. Although erratic at times, the trend is always upward.
According to Kosares, I is for The Inflation-Deflation Debate. On the one hand, the deflationists maintain that the present debt levels will end in default. When that happens, banks will fail, triggering an economic crash. Which means the price of gold will skyrocket. On the other hand, the inflationists say that the government will have no choice. Rather than letting the boat capsize, the government will frantically begin bailing. Which means monetizing the debt by printing more and more paper money. The end result will be inflation followed by hyperinflation. Gold will skyrocket. In other words, both scenarios bode well for gold. As Kosares points out, “Yet to the gold investor, the inflation-deflation debate is purely academic.” Gold is a sure-fire hedge no matter what occurs.
Kosares makes an important distinction between gold and silver in K is for Kindred Metal – Silver. He states silver and gold are “two quite different metals and are used by portfolio planners for two entirely different purposes.” Gold’s primary function is to preserve wealth, while its secondary function is as a commodity. Whereas silver is just the opposite. Silver is a commodity first and a preservative second. Therefore, silver should be played like a commodity. “It should be held for its profit potential and at some point converted back into cash or gold.” Kosares’ advice to investors is to add silver to their portfolio after they have established a “strong gold position.”
In Kosares’ alphabet, the letter M is for Myths and Realities about Gold. And for beginning investors, this is a weighty section, because the author dispels some of the old wives’ tales about gold. One of the fables discussed is “gold is a barbarous relic of past monetary systems, irrelevant in today’s fast-moving, computerized markets.” Kosares dispels this myth by quoting Paul Volcker, who stated “that central banking as we know it today is, in fact, largely an invention of the past hundred years or so …” In other words, gold has been around for thousands of years. And has always had “universal value for both individual investors and nation-states.”
The ABCs of Gold Investing concludes with the letter X – the XYZs of Gold Investing: Closing Thoughts. Kosares sums his book up nicely by setting forth two basic reasons for investing in gold. The first reason is the lack of a gold standard. This means paper currency is issued willy-nilly. The result is paper currency that resembles Monopoly money – there’s a lot of it but it’s not worth much. To protect their assets, investors should enforce their own gold standard and buy gold. The second reason is one of supply and demand. International demand for gold far outstrips mining production. Which means the price of gold – ultimately – has no where to go but up.