SOS Gold

As usual, the two school of thoughts:

Jim Rogers said:
I don’t know how you can call it a bubble. A bubble is when everyone and his mother owns gold. Today, most people still don’t own gold.

Warrent Buffett said:
Look, you could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?

MyView:

Fact: over the last 10 years, physical supply exceeds the demand of gold

Fact: over the past 10 years, transaction of gold is 70% physical:30% financial (paper gold)

Fact: today transaction of gold is 70% financial (paper gold): 30% physical

Fact: Gold, on its own have no economic value, unlike a farmland, a property, an energy company, BUT in human civilisation, gold is perceived as REAL money

Fact: 1971, Presiden Nixon lifted gold as a reserve, fiat money is created. USD disposable income had dropped more than 95%.

Fact: all the gold's worth on the earth at the moment (USD1400 per oz) is about USD5.5 trillion, world GDP is about USD60 trillion.

Fact: it will not be fruitful to try to reconcile why physical gold price price goes up when supply exceed demand, it is the paper gold that is traded that is conducted between willing buyer and willing seller, no logic required.

Argument for Buying GOLD - most countries is printing fiat money, over a long run the disposable income for the currency per gold oz will drop. This is the conventional way how human view GOLD and FIAT MONEY.

So, best way to do a research one can consider is how much yen per gold oz in 1989 (peak of property and stocks) and how much yen per gold TODAY to prove whether it is a good idea to buy gold and hold long term (10-20 years)

Let's look at Japan
1980 - 200,000 (yen per oz of gold)
1985 - 90,000
2000 - 28,000
2010 - 100,000

The lesson is: keep your money stable, and taxes low. When Japan was on the gold standard in the 1950s and 1960s, and reduced taxes steadily, it was the growth wonder of the world.

Lets see what happen in Japan

The Tokyo government, aware of unsustainable asset valuations, embarked on a draconian series of steps to depress property prices throughout the 1990s.

This not only blew away the froth of unsustainable valuations, it also demolished the real, fundamental value of property. They began with a series of tax measures on January 1, 1990 – the first day of the bear market – which eliminated certain preferential capital gains tax treatments for property.

In 1992, the tax rate on short-term capital gains (under 2 years) on property was raised to 90%. Long-term gains were taxed at 60%. Additionally, a 0.3% national property tax was introduced (this was several multiples greater than existing property taxes), plus a City Planning Tax of 0.3%.

Then there was a Registration and License Tax of 5% of the sale value of a property...a Real Estate Acquisition Tax of 4%...an Office Tax of 0.25%...a Land Ownership Tax of 1.4%...a even the regular property tax, the Fixed Assets Tax, was effectively raised by several multiples.

From 1990 to 1996, Japanese property values imploded by as much as 70%. However, the revenues from this tax rose by 46%. You can do the math.

All of this resulted in epic levels of bad debts at banks. For some reason, the banks managed to get the blame for this, as if they were responsible for the unprecedented monetary deflation during the decade, or the tax assault on property owners. Banks wrote off and liquidated loans continuously during the decade. However, the economy was unable to improve due primarily to the hideous monetary deflation, so more bad debts kept piling up as one borrower after another reached the end of their resources. This gave the appearance that the banks "weren't doing anything about their bad debts." As fast as they bailed out their boat, new water was coming in.

In 2000, the government, still convinced that banks "weren't doing anything about their bad debts," undertook an extensive audit of bank assets on a loan-by-loan basis. They wanted to determine if there were any "hidden bad debts," borrowers that had effectively gone bust but were being carried as performing loans. Then, having dug all the skeletons out of the closet to their satisfaction, they mandated that the banks resolve all these bad debts over the course of the next few years. Banks were required to state their progress under this plan in their financial statements.

Thus, we can see with great precision what banks were up to. As of September 30, 2000, Sumitomo Mitsui Financial Group had "bankrupt and quasi-bankrupt assets" of ¥653 billion. These were the real bad loans – those that had defaulted. There were another ¥2,594 billion of "doubtful assets".