Hidden Inflation: Gold

One of my clients came into the office last week faced with what she perceived to be some financial issues. She was a woman in her early sixties who lived alone, and had run up credit card debt of approximately $10,000.00 and was having difficulty in paying it back. She was receiving unending phone calls and letters. She came to me contemplating bankruptcy.

We sat and looked at her assets. She rented an apartment. She owed money on her car. She had some savings but was reluctant to wipe herself out. On a hunch, I asked her about jewelry. What did she have? I told her to go home and take inventory.

When she returned a few days later, she had a smile on her face that went ear to ear. In her jewelry collection she had numerous gold chains, rings with fake stones, bracelets, earrings, most of which she hadn’t worn for years. Many of the rings were 18 carat, and she told me many of them were forty years old, heavy, and "butt ugly," her words, not mine.

She took them to her local gold dealer, and she walked away with $13,000.00 in cash. Her jewelry box is now substantially emptier, but her debt is paid with some left over. I asked her what she did with the other three grand, and she told me she went and bought some inexpensive costume jewelry but was stylish nonetheless so she could actually wear it.

Those of us who live in the real world, not the Washington DC world, know that there is inflation in the economy. We see it at the gas pump. We see it in the grocery store. We see it in clothing costs. Of course, the government says it isn’t there. What can I say?

But the real inflation is in precious metals. Gold is pushing $1600.00/oz. Silver and platinum are trading at all time highs. Diamonds are going through the roof. If you want to know what your money is worth, a stack of 18 one ounce American Gold Eagle coins is worth $28,000.00. THAT should give you pause. You can hold those one ounce coins in one hand. That is what your money is worth, and it ain't much.

We should be disturbed that countries like China and India have been steadily moving their reserves out of the dollar and into commodities, and making noises about returning to the gold standard in order to protect the value of their assets. Nobody wants to hold debt denominated in currency that is being devalued. Printing currency and excessive debt, whether held by individuals or governments, is inflationary.

While my client’s story is light hearted and interesting, it is also a cautionary tale. Inflation is insidious, especially when it is occurring in an area in which most Americans don’t have any actual experience. Average Americans are not familiar with precious metal commodity markets and don’t hold gold as an investment.

The markets are out of whack. If the world moves to a new reserve currency based on gold or a basket of commodities, we are screwed in a major way. The financial crisis of 2008 will look like a walk in the park.