As The Dollar Falters, Gold Becomes Insurance, Not Speculation

Authored by Douglas French via The Mises Institute,

Economics trumps sentimentality, and gold’s elevated price has some people raiding the family jewelry box to pay bills. 

“Young people are not wearing grandma’s jewels. Most of the young people, they want an Apple watch. They don’t want a pocket watch,” Tobina Kahn, president of House of Kahn Estate Jewelers told Bloomberg.

“Sentimental is now out the door.”

When times are tough, treasures change hands, the late Burt Blumert, once a gold dealer and Mises Institute Board Chairman, used to say.

“Prices are high, and I need cash,” Branden Sabino, a thirty-year-old information technology worker said, adding that with the cost of rent, groceries, and car insurance rising, he doesn’t have any savings. He sold a gold necklace and a gold ring to King Gold and Pawn on Avenue 5 in Brooklyn.

“People are using gold as an ATM they never had,” said store owner Gene Furman.

At King Gold, fifty-five-year-old Mirsa Vijil pawned a bracelet to pay her gas bill.

“Gold is high,” she said, adding she’d never pawned her jewelry before but will do it again if she needs to.

Adrian Ash, director of research at online gold investment service BullionVault says there is twice as much selling as a year ago on BullionVault’s platform. “People are very happy to take this price.”

“It’s very busy and we are getting more calls than ever before about clients wanting to bring in their jewels,” Kahn said.

“I’m telling the clients to bring them in now, as we are at unprecedented levels.”

So while there is plenty of liquidating to pay the bills, demand at the United States Mint is tepid, with sales in March the worst since 2019 for its American Eagle gold coin.

It turns out more than a few of those well-publicized Costco gold bar buyers are having trouble selling them. The bars, not being American Eagles or other similar gold coins, are not as liquid, given that the seller, Costco, will not buy them back. The Wall Street Journal reports, thirty-three-year old Adam Xi called five different gold dealers to get a price he would accept for the gold bar he bought at Costco in October.

He was offered $200 less by one dealer than the $2,000 he had paid. But he found a Philadelphia coin dealer near his home willing to pay $1,960, or twenty dollars under market price.

Mr. Xi has learned, or should have learned, that buying gold to turn a quick profit is a fantasy. His plan was to rack up credit-card points buying the gold and then quickly resell it for a profit.

Buyers can expect their gold to immediately lose around 5 percent of its value, according to Tom Graff, chief investment officer at the wealth advising company Facet. One pays a premium to buy and pays fees to sell.

“You need a holding period that’s long enough to overwhelm that cost,” said Graff.

Luke Greib told the Wall Street Journal that he sold a one-ounce Credit Suisse bar on a Reddit page dedicated to trading precious metals to avoid taxes and fees.

Buying physical gold is purchasing insurance against monetary mischief by the Federal Reserve, not to earn a profit via a quick flip.

Perhaps it’s hard to imagine currency destruction so devastating that your gold would serve as not only a store of value but a medium of exchange. Peter C. Earle explains in a piece for the American Institute for Economic Research, “During the peak of its 2008 hyperinflation, [Zimbabwe] experienced a catastrophic economic downturn, characterized by the issuance of billion—and trillion-dollar banknotes that were, despite their nominal enormity, virtually worthless.”

Dr. Earle writes that twenty-eight years of inflation “topped a total 231 million percent” and “the ZWD was demonetized in 2009.” The government is making its sixth attempt at a new currency, Zimbabwe gold (ZiG). “ZiG is there to stay forever,” said Vice President Constantino Chiwenga. “This bold step symbolizes government’s unwavering commitment to the de-dollarization program premised on fiscal discipline, monetary prudence and economic revitalization.”

Reportedly, ZiG “is backed by a basket of precious metals including about 2.5 tons of gold along with $100 million of foreign currency reserves held by the central bank.” As always, the Zimbabwe authorities are already blaming speculators for price increases. “Speculators should cease,” Chiwenga said. “Behave, or you get shut down or we lock you up.”

Dr. Earle has his doubts about whether the Zimbabwean authorities will maintain the ZiG backing with the required rigor. While he hopes for success, “Without fundamental changes guaranteeing private property protection, pro-market reforms, and safeguards against corruption, though, the ZiG is likely to retrace the unfortunate steps of its predecessors.”

The reason to buy and hold gold is just in case the Federal Reserve goes the way of Zimbabwe.