Professor Elam

Sunday Feb 14 2010

Sometimes professors make statements to absurd it is hard to imagine how they retain their credibility. 

In the last ten years gold has risen from $300 to $1200, and backed off a bit. The reason is the lower dollar and the increasing suspicion of all fiat money in the world. Fiat come from the Latin word fio meaning 'to be.' Fiat money is money because the government issuer says so, period. So what is the difference between monopoly money and Zimbabwe money, not much. The reason is that Zimbabwe does not have much economy to back up its huge amount of currency in circulation. Lately the Euro has gone down against the US dollar over worries that Portugal Ireland Greece and Spain have spent beyond their productive capacity. Not to sound like  a broken record but, many countries and now US states and cities are spending a large portion  of their annual productive capacity on government, simply moving money from one productive sector to another non productive sector. 

At any eRW ON Pfw 10 of the Feb 14 Parade magazine (okay so it's not Fortune) Univ of Pennsylvania Wharton School Finance Prof Jeremy Siegel declares that the US should have sold its gold in 1971. Well Jeremy that was when gold was less than $100, as you know it peaked at $800 in 1981 and now has surpassed that by 50%. The IMF just sold its gold, a large portion to India, so it can hold more fiat money, hmmm. Gold is the only real money since politicians cannot print it from trees. Period. 

I suspect what will eventually happen is that the US Dollar will stair step down in value as Congress has just raised the debt ceiling over $14 trillion. At some point, gold will continue to move up. States and cities will meet their Waterloo this year in finally having to deny unionized employees both raises and defined benefit pensions, there is just not enough money for that. But first I suspect the Federal Government will try to 'rescue' some of them. At any rate, as currencies collapse around the world, the US will finally have no choice but to re value its gold holdings at a market price of thousands of dollars to provide some backing for its currency. And at that point Jeremy, gold will be golden.