What if the Aussie Dollar Collapsed?

One of my hobbies in life is to read financial porn, i.e. stories about how the economy will collapse in the future. One such scare story I have read is in the Contrarian Investors' Journal titled Will There Be an AUD Currency Crisis?

This piece explains that the Australian economy is highly leveraged to the mortgage debt market. Even though public debt in Australia is around 7 per cent of GDP, this masks the massive extent of private sector debt in the country, mainly held by invididuals in the form of mortgage debt.

Everything will be fine if Australians continue to be able to pay their mortgages, and signs so far seem to suggest that Australians are managing to pay their mortgages. Pay your mortgages like the obediant slaves you are!

However, if something bad happens, chances are the government will take over these banks and, as in America, private debt will be nationalized and public debt will skyrocket. Furthermore, foreigners will be less likely to lend to Australians (both Australian governments and Australian banks) and this will cause the Aussie dollar to collapse. Furthermore, the unwinding of the carry trade will also smash the Australian dollar.

A great deleveraging and unwinding of the carry trade occured in late 2009 at the height of the GFC. During this great period of deleveraging, the Australian dollar collapsed to the point where A$1 = US$0.65. However, there was a recovery in the stock market, the American government started to print money like crazy, and now the Australian dollar has soared against the US dollar where A$1 = US$1.01. I feel very superior to the Americans at the moment because this means that my salary in US dollars rises a lot and I admit a guilty pleasure of mine in my spare time is to browse through Wikipedia and check out the median incomes of people in certain states and counties in America and then compare my income to their income. Because the Australian dollar has soared so much, my income converted into US dollars is approaching the median incomes in many of the exclusive areas in America! This means I have become rich according to American standards! (I know I am not really rich and that this illusory wealth is just a product of American money becoming worthless.)

Given that everything is going so well at the moment, I often wonder how long it will last. If life has taught me any great lesson it is that you should always have a plan B. You should always have an exit strategy. What if the Aussie dollar collapsed? What do you do?

One thing we can look at is what happened in the last deleveraging when the Australian dollar. Some people suggest that buying American shares is a good idea if you want to protect yourself from a falling Aussie dollar. But the graph below shows that the American stock market--as measured by the S&P500 index--collapsed with the Australian dollar.

What can you do? The graph above suggests that gold is a good idea. Even the GFC struck, stocks fell, and the Aussie dollar plummeted, the price of gold in Australian dollars went up.

This analysis is purely technical and looks only at historical data. It does not look at any fundamental reasons why gold would be a good hedge against an Aussie dollar collapse. Personally I believe that those who are worried about an Aussie dollar collapse should convert Aussie dollars into both US dollars and gold (physical gold or gold ETFs). But I don't necessarily believe the Aussie dollar will necessarily crash. If Australians continue to pay their mortgages, then all should be fine. Even if they cannot afford to pay their mortgages, surely the Australian central bank will lower interest rates.

Differences Between Gold and Real Estate

One of the benefits of investing in gold is that it protects against inflation. One cause of inflation is a rise in the money supply, which can be caused by money printing by the government. Money printing is very tempting for governments because it gives politicians more money to spend without actually increasing taxes. Even though printing money runs the risk of increasing prices, it's a more subtle way of raising revenue rather than directly taxing people. Printing money also devalues the currency, making exports more attractive.

Gold cannot be printed, so it is much more difficult for the supply of gold to increase. Gold can be mined from the ground, but obviously this is not as simple as printing money.

Some people suggest that real estate is a good investment that can keep up with inflation and has similar safe haven properties as gold. They argue that in times of hardship, you can grow food on your land. Furthermore, land cannot be printed. There is a finite supply.

It is true that you can grow food on land, but there being a finite supply is hardly helpful. The major problem with land is that governments have too much control over it. Physical gold is difficult to tax. It is almost pointless for government to tax gold because people tend to buy physical gold and trade among themselves, leaving no paper trail. Gold is portable and can be easily stored and hidden. Land, on the other hand, is not portable. It cannot be smuggled out of the country. You cannot hide it from the government. The result is massive taxation. The reason why banks are very happy to lend to home buyers is because they know that if they lend to you, they have you by the balls. You cannot run off to another country if you cannot pay your debt. The bank can easily sieze your land and sell it. Gold is different. If you borrow money from the bank to buy gold, you could easily run off to another country with the gold. Gold is freedom. Real estate is slavery.

If government were to slap a tax on gold, people would simply move it out of the country or just do informal transactions. If government were to slap a tax on land, people cannot do anything about it but to accept it. Just as government can print money, government can also print land. Not literally! For example, the government can control the amount of land released for residiential development by altering the urban growth boundary. If government wants to keep land prices higher to collect more land tax or land transfer duties, it can limit the supply of land. If government wants to help out property developers, it can increase the supply of land.

In an end-of-the-world scenario, when banks collapse and civilization as we know it is finished, land ownership will be worth nothing because the land you own is land you own thanks to a piece of paper enforced by the judiciary. If civilization breaks down, it is assumed that the judiciary has no power and hence your land is gone. Even though you may live on it, it's not really yours. Gold is different. Physical gold is held by you and hidden by you. Since you control it and since you own it by force or threat of force, then it is yours, regardless of what a Supreme Court judge says.

Arguments Against Rick Ferri’s Take on Gold

The latest round of US money printing has pushed the price of gold above US$1400 per ounce. The attackers of gold have come out and criticized the metal, claiming it is a poor investment. Some blog gives Rick Ferri's Take on Gold, providing arguments against gold. After reading this article, I felt like I had to respond to the points made by Rick Ferri.

Argument 1: Gold ETFs will not protect you in the event of financial or economic catastrophe.

Response: Just because there is an economic catastrophe, it doesn't mean the banking system will collapse. It doesn't mean all ETFs will lose value. The GFC is an economic catastrophe, yet ETFs didn't all go to zero.

If you believe that there will be a total collapse of civilization such that banks will not functions, stock exchanges will be no more, airlines will not work, and so forth, then gold ETFs are not good. But this does not mean gold is not useful as an investment. In such an end-of-the-world situation, physical gold, which you can feel in your own hands, is preferable. Many people prefer physical gold rather than ETFs.

I am an ETF buyer. I agree that in an apocalyptic situation, I'll likely lose my money. If the banks collapse, I agree I will likely lose money. So what? That is a risk I understand and that is a risk I am willing to take. I happen to believe it is possible that there will be an economic catastophe that is extreme enough that it will cause enough fear and inflation (or even stagflation) to cause gold prices to skyrocket. All this can happen without all banks collapsing or the entire financial system completely being wiped out. Stagflation has occured during the '70s. It occured in the late '00s as well just right after the GFC when oil prices skyrocketed. Stocks will not protect you during stagflation. Gold usually does.

Argument 2: Investing in gold is like investing in bricks. Bricks produce no dividends. A brick will always remain a brick. One brick will not become two bricks.

Response: An investment does not have to produce dividends or cashflow to be good. Gold can go up in value as measured by particular paper currencies. Gold can also maintain purchasing power.

Here is what Rick says:

You can take a bunch of bricks and pile them in your backyard and look at them every day and say, ‘Go up in value, go up in value.’ But you can’t say, ‘What kind of dividends are my pile of bricks going to pay me this year?’ Because it’s zero. How much interest am I going to get from my pile of bricks? None. Is my pile of bricks going to become two piles of bricks over the next 10 years? No, it’s going to be one pile of bricks a year from now, 10 years from now, and a hundred years from now. You’re just hoping that someone comes along who thinks that pile of bricks is worth much more than you paid for it.

Dividends and cashflow are great. If you put money into a bank savings account, you get cashflow from the interest. Many other investments don't do this. Stocks pay dividends, yes, but the dividend yield on stocks is usually less than the income yield from cash investments, but people invest in stocks because they want capital growth. Not everyone cares about dividends. Some people want capital growth. Gold does not pretend to do pay dividends to create cash inflows. That is not the point of investing in gold. Gold can, does, and has gone up in value. In fact, gold has gone up in value more than any other investment in the last three decades.

Gold Does Not Produce Income

Even though there have been fears of a double-dip, the stock market has gone up. The All Ords has moved from about 4500 last month to 4700 now. Surveys indicate that fears of a double dip are starting to go away. During this period of stock market growth, the price of gold continues to go up as the US dollar continues to deteriorate. Gold is reaching US$1270 per ounce now, citing some people to call it a bubble.

But if gold is a bubble, why would it be? Before we label any asset price increase a bubble we must ask ourselves first if there is a sensible reason for asset price going up. Gold is valuable because its chemical properties make it suitable for use as a currency (read Properties of Good Money for more information about this concept). Many currencies around the world are being devalued because of money printing by government, leading to the price of goods going up. Gold cannot be easily produced as it requires mining, which is difficult. This means that the rarity of gold, which affects its value, is out of the hands of government and therefore gold is free of corruption.

The ABC came out with an article claiming that gold is a bubble (read The Gold Rush is Fools' Gold). The reasons for this are uninspiring. The article mainly appeals to authority by citing Gearge Soros. It also claims that because gold produces no income (e.g. real estate produces rent, stocks produce dividends, etc) then gold therefore has no value and therefore it must be in a bubble. 

"Gold will never generate cash flows, so for purist investors it has no value. From this point of view, gold itself is in a bubble driven by investor fear, implying that the price of gold will collapse when investors realise the world is not ending," Ms Howitt noted in a statement.

This is the worst argument I have ever heard. An investment doesn't need to produce cash flow to be valuable. An investment is any asset that holds or increases in value. Some assets produce income, which gives it value. However, there are many assets that do not produce income that can go up in value, e.g. gold, paintings, and wine.

If you invest in stocks at the moment in Australia, you'll get a dividend yield of about 3 per cent. If you invest in bank term deposits, you'll get about 6 per cent. If we went by the rule that an investment's income is the only indicator of the investment's value, then it would be wise to invest in bank term deposits. However, many people invest in shares because even though the dividend yield is relatively lower now, there is the potential for future capital growth as companies reinvest profits back in their businesses. The most successful investment in history--shares in Warren Buffett's Berkshire Hathaway--has never produced any income. However, term deposits, which give income yields of around 6 to 8 per cent on average, have zero capital growth. Measuring gains with both capital gains and dividends shows that the historical performance of stocks and gold have been better than than that of term deposits.

Inflation Much Worse than Deflation

According to The Alpha Strategy, which in my opinion is one of the greatest books on investing ever in the world, there are three things one can do to preserve purchasing power: lending, investing, and buying.

Lending includes keeping money in a bank account since you are lending it to the bank and the bank pays interest for this privilege. It also includes buying government bonds, which effectively is lending money to the government. Investing refers to owning a business and sharing in the profits of that business. Investing includes actually starting your own company or buying shares. Buying refers to buying actual tangible things like gold or land.

There are two major problems with lending: inflation and taxation. When you lend money, the money you receive back is taxed, which eats away into any profits you could make. Another problem is that inflation eats away at purchasing power. If you keep $100 in the bank and get $103 at the end of the year in interest, inflation running at 3 per cent per year means that you are no better off by putting your money in the bank.

Lending then is only good when there is deflation. The problem with investing for deflation is that deflation tends not to happen often, mainly because government is so scared of deflation that they will do what they can to prevent it, which means that they are willing to create inflation, even though inflation hurts people by reducing the purchasing power of their wealth.

Inflation can be seen as good because inflation motivates people to work hard and spend. With the price of everything going up due to inflation, people are forced to work even harder and harder in order to afford to live. If the state is seen as an apparatus of slavery then government-induced inflation is the way that the slave owners (the government) can whip (create inflation) his slaves (the citizens) in order to get them to work.

Assuming you are able to keep your job in a deflationary recession (not a realistic assumption for most jobs) then deflation is not a bad thing because the price of goods goes down. Because deflation is not a major disaster and because it is rare, I think that it pays to not devote so much of your wealth to preparing for deflation.

Many financial advisers talk about risk tolerance and asset allocation. Asset allocation refers to the percentages you devote to certain types of investments, mainly stocks and bonds/cash, i.e. how much you will invest and how much you will lend. If you are willing to take on more risk, you invest more in stocks and if you are more of a conservative investors, you invest more in bonds/cash. In my opinion, because inflation is so much worse than deflation (because prices of things go up), then it's better to devote a little more to assets that keep up with inflation (stocks, gold, and real estate) rather than assets that do well during periods of deflation (bonds and cash).

Based on my gut-feel analysis of the world economy at the moment--during this period of "unusual uncertainty," as Bernanke described it--I believe that you should hold about 60% in stocks, 30% bonds or cash, and 10% gold.

Image: Tao Zhyn

Inflation vs Deflation

For a little less than a year now the stock market has been going sideways. That is, it has gone up and then down, but the net effect is sideways. The All Ords chart below from Yahoo! illustrates this. Since September 2009, the Australian stock market has been going up and down, bounching back and forth between a ceiling of 5000 and a floor of 4500.

However, recently we have seen the stock market start to plunge below the 4500 point floor, suggesting that a dreaded double-dip recession may be just around the corner. Chinese premier Wen Jiabao warned that a double-dip recession was likely, and billionaire investor George Soros claimed that the second phase of the GFC was imminent.

This may be it!

For the last few days of the 2009-10 financial year, stocks all over the world have been tumbling. On 1 July 2010, the price of gold collapsed from US$1250 per ounce to US$1200 per ounce, and at the same time long-term US Treasury bonds have gone up in price. All this points to investors expecting deflation in the future. That is, prices are going to fall. Some people who complain about high petrol and electricity prices may be happy with this, but deflation may result in falls in stock prices and real estate prices, and this will destroy wealth, especially since many people hold wealth in their houses and their retirement funds. Economic theory also states that falling prices encourage consumers to horde cash and delay purchases becuase they expect goods to be cheaper in the future. This hording of cash and lack of spending will reduce sales, reduce business profits, and in turn lead to higher unemployment or lower wages, which will reduce demand for goods even further as consumers who have their wages cut cannot afford to buy goods. This will lead to even more price cutting by businesses, which leads to a vicious cycle or a deflationary spiral. As people lose jobs and suffer from wage cuts, they cannot afford to buy houses and the many who already suffer from mortgage stress will default. This is a nightmare economic situation.

On the other hand, there are those who believe that deflation will not happen. They claim that because deflation is so nightmarish, the government will not allow it because the government wants to win votes. Rather, the government will continue to simulate the economy by giving away cash. Splashing cash into the economy will increase wages and increase stock prices and real estate prices. Inflation will especially increase gold prices. I have my doubts about this inflation story because splashing cash into the economy cannot last forever. Eventually the government will run out of money and will have to go into debt, which is what we are seeing in Greece. Voters surely will not support neverending increases in public debt, and lenders (i.e. bondholders) will not tolerate it. The demands of voters and lenders should force governments with high public debts to impliment austerity measures that cut spending and raise taxes. Tax increases will retard economy growth, which pushes down stock prices.

If you think inflation is likely, go into stocks and gold. If you think deflation is likely, go into cash and bonds. If you are unsure, equal amounts of all four is probably the best move.

Investing During GFC II

A few years ago the world was plagued by the global financial crisis (GFC) that originated in the USA where out-of-control lending led to a property price bubble that eventually popped, leading to the destruction of private debt, which brought down property prices, stock prices, and commodity prices.

Today, what we are seeing is not really a private debt problem but a government debt problem. Instead of private banks needing to be bailed out, sovereign governments now need bailing out. The United States is in an interesting position because the stimulus and bailouts of the government have significantly increased government debt. These debts taken on by the banks are absorbed by the government, which means the average American pays for the mistakes of the banks via taxes.

The Greece economy is in tatters as it faces the likely scenario of defaulting on their debts. Worst yet, similar problems may also occur in many other countries, not just the PIGS--i.e. Portugal, Italy, Ireland, Greece, and Spain--but arguably also countries like the UK, France, Japan, and the US.

In my opinion, the debt problem in the world is so severe that we are likely to see the stock market go up and down but remain flat for maybe a whole decade. Here is the reason why. If governments are in debt then they have only three options: print, cut, or default. They can print money, cut spending and increase taxes (or both), or default on their debt. If they print money, there will be a bout of inflation, and stocks will rise. If they cut spending and increase taxes (or both) they will impede business and this will reduce stock prices. If government defaults on bonds, the cost of borrowing will be higher, which will lead to higher interest rates, which will prevent businesses from borrowing, which also leads to reduced stock prices. Some countries can print money and some cannot (e.g. Greece cannot print Euros). If we assume about half of countries in crisis will print money and half will default or increase taxes then the world economy should see saw back and forth for a long time.

To invest during GFC II, I believe you need to address both inflation and deflation. Protect yourself against deflationary recession by buying bonds or cash when you notice a rally in the stock market that you think is most likely the cause of irrational optimism or money printing. Any debt-fuelled growth should be looked upon with skepticism and you should accumulate cash or bonds. However, once the market pulls back and stock and commodity prices go down, try to acquire stocks and precious metals, probably biasing your stocks to resource and energy stocks.

I also feel that you should be a little bit optimistic and bias your portfolio a little more towards stocks rather then gold, bonds, or cash. This is because something may happen in the world that improves the economy. Technological improvement may result in a massive worldwide rally, so a stock/bond ratio or 2:1 seems good to me.

Gold Mining Stocks vs Physical Gold

Many Americans have been talking about how gold prices have gone up so much. In US dollars, certainly gold has gone up a lot, but that is only because the US dollar has weakened considerably in the last year. If you look at gold prices in Australian dollars (see the red line in the chart above) you will notice that gold prices have been going down.

The price of gold in Australian dollars has gone down in the last year and this seems to coincide with the Australian (and global) stock market rally that began in March 2009. As stocks move up, gold moves down. The green line in the chart above shows Australia's All Ordinaries index.

The blue line shows the stock prices of Newcrest Mining (NCM), which is a gold mining company listed on the ASX. What is interesting is that the stock prices of NCM seems to be influenced by both gold prices and the stock market. It seems to be more or less an averaging out of gold prices and broad stock prices.

Plasma TV versus Gold

Michael Pascoe wrote an article in The Age criticizing gold as an investment. In an article titled Is a Plasma TV Better than Gold?, Kris Sayce responds by saying that gold is a good investment because it is better than buying a plasma TV.

The value of your plasma TV isn't going to rise at any time, regardless of how long you own it.

Keep it for five years and you might be lucky to get back one-tenth your purchase price if you flog it on eBay. Adjusted for inflation it would probably be closer to one-twentieth the purchase price.

So why is there such a fuss about gold being in a price bubble? Sure, you can't watch your favourite soap opera on a bar of gold, but even if we look at gold as a consumer item rather than an investment item it doesn't make sense that so many professional investors and analysts and even the general public would rather not buy the stuff.

I mean, let's imagine you buy an ounce of gold at the current price of AUD$1,264.29, what do you think the worst possible outcome could be?

Could it fall to AUD$1,000? Sure it could. Could it fall to AUD$800? Why not.

And could it even fall to AUD$500? Of course it could. But we know the price of a TV is going to fall much more than that over the next five years. We know that as a fact.

Yet that doesn't stop consumers from splashing out a couple of grand on the latest 600 inch plasma.

I think what Sayce does not seem to consider is that you can get a lot of entertainment from a plasma TV whereas a bar of gold doesn't entertain you in the same way. You cannot watch a movie on a bar of gold.

I am personally not anti-gold. I think gold is a suitable element to use as an alternative currency simply because of gold's inherent physical and chemical properties, namely liquidity, scarcity, portability, and uniformity. These properties make gold very suitable as money. Paper money, I believe, is more suitable than gold mainly beause it's easy to carry around paper money (whereas carrying around a bar of gold to go shopping is not so practical). Even better is electonic money. But the problem with this type of money is that the supply is can be manipulated by government whereas gold supply depends on gold mining, which government has limited control over.

Harry Browne's Permanent Portfolio

How should you invest your money? I'd like to talk about what I think is the best way to invest your money. It is called the permanent portfolio and it is invented by a libertarian named Harry Browne. The permanent portfolio is simple. Divide your money in the following way:

25% in cash
25% in gold
25% in government bonds
25% in stocks.

The rationale for this is that you have investments that perform well in any economic environment. Government bonds performs well during deflation, gold performs well during inflation, cash performs well during bear markets, and stocks perform well in bull markets.

When I explain to other people why this approach makes sense, I like to use a medical analogy. The discipline of medicine exists to protect people from death and pain, which are caused by diseases. In order to be healthy, an individual takes steps to immunize himself from various diseases. To immunize yourself from the flu, you take flu shots; to immunize yourself from obesity, you exercise and eat less; to immunize yourself from calcium deficiency, you drink milk; and so forth.

Investing is the same. You invest to protect yourself from death or pain from poverty. Poverty is caused by economic diseases, such as inflation and stagflation. To immunize yourself from inflation, you hold gold; to immunize yourself from deflation, you hold cash; to immunize yourself from a bear market, you hold government bonds; and so forth.

How do you move from the economic theory and actually implement this permanent portfolio in practice? Here in Australia you can buy government treasury bonds from the Reserve Bank. It may be simpler, however, to just allocate your superannuation fund in such a way so that the right amount is in fixed-interest investments, e.g. read MTAA's website about diversified fixed interest. To invest in cash, there are various funds that invest in short-term money markets, e.g. Vanguard Index Cash Plus Fund. Another alternative is to use your super fund to invest in cash or simply put your money in your bank's savings account, which at the moment is government guaranteed. Investing in stocks can be achieved easily using a mutual fund, e.g. from Vanguard or Colonial First State. You can also use ETFs if you're comfortable with it, e.g. from iShares or State Street Global Advisors. Gold is more difficult. Buying physical gold, in my opinion, is dangerous. You can buy gold certificates from the Perth Mint. Your deposit at the Perth Mint is guaranteed by the Western Australian government. Another way you can protect yourself against inflation, I think, is to buy energy and mining stocks, e.g. buy up BHP stock. Even investing in most Australian or emerging markets mutual funds, I think, gives you adequate exposure to energy and mining companies, so maybe gold is not necessary.

Physical Gold or Gold Mining Stocks?

In terms of Australian dollars, the price of gold has reached all time highs. Because the US dollar appreciated in 2008, the price of gold in US dollars actually went down in 2008.

I have been thinking of about buying some gold, but instead of worrying about where in my house I should hide it, I was thinking about buying gold mining stocks instead. Australia's biggest gold miner is Lihir Gold.

Looking at the price of Lihir Gold shares, it is clear that the company's share price seems to move together with the Australian market (the All Ords index) more than it does the price of physical gold.

This could mean that gold mining stocks are a very imperfect substitute for physical gold. Perhaps this also shows that gold mining stocks, and even the Australian stock market, is undervalued.

How to Bury Gold

I don't have any gold, but I wish I had because gold seems to be the only asset going up at the moment. It is true that gold has gone down in the last year but in the last 5 years it has gone up a lot. I think holding 50 per cent gold and 50 per cent cash should protect you whether or not the economy is going through deflation or inflation.

Gold is purchased because investors fear that currencies like the US dollar could collapse. If this happens, civilization itself could collapse, and gold would likely be the new currency.

Dave Ramsay believes that investing in gold is a waste because gold has historically performed badly and because, in an end-of-the-world scenario, survivors are likely to use barter instead. I believe that there will be room for barter but the problem with barter is the need to establish a double coincidence of wants. This makes barter inefficient and is the reason why money is used today. When you go to the petrol station to buy petrol you do not pay with apples grown in your backyard because the petrol station owner may not want apples.

If you buy gold, one question that pops up is how to store it. If you store it in a safe deposit box in a bank, problems can arise. If civilization collapses, banks will likely collapse.

If you keep the gold in your home and hide it around the house, thieves can steal the gold. There is a good chance they will use metal detectors to find your gold.

I recommend investors diversify. Keep maybe a third of gold in safe deposit boxes in various countries. Then bury your physical gold bullion.

I recommend investors buy a huge field of land in the country. Then dig thousands of holes in the ground. Bury the gold (or silver) in only some of the holes. Only you should know which holes the gold is buried in. Then get some copper bullion and bury these in the other holes. Copper is normally much cheaper than gold. If a thief tries to dig to recover the gold, he is likely to find lots of copper, which will mean that he will have to work a lot to recover a little. If you know which specific holes have the gold then you can recover it with more efficiency.

Keeping copper bullion buries is important because metal detectors cannot tell the difference between copper and gold.

Let me give a numerical example. Right now gold is selling for about US$800 per ounce, which is $16 per pound. Copper is selling for $1.50 per pound. Suppose you have 1000 holes. Each bar or coin of gold or copper you have is one pound in weight. You have 100 pounds of gold and 900 pounds of copper. This means that in total all the precious metal you have buried will equal $2950 in value. Suppose also that it takes one hour to dig a hole.

If you didn't know where the gold is hidden, you would have to spend one hour on each of the holes, which means you will spend 1000 hours digging and you will get $2950 for it. This means you earn $2.95 per hour. Not much. Suppose instead that you knew where the gold was buried. Then you will spend only 100 hours and you will make $1600 worth of gold. This means you earn $16 per hour. This is better. (You will leave the copper in the ground because it's not worth it digging it up and it's only there to fool the metal detectors.)

You can change these numbers around a little. Maybe bury more gold together, have more holes, and so on, and you can configure it so that the payoff of knowing where the gold is is so much higher than not knowing that any thief would not bother trying. If the payoff from knowing where the gold is hidden is $100 per hour but the payoff from not knowing is, say, 1 cent per hour, then a thief would likely go find someone else to rob.

While you're putting copper and gold bullion in the holes, I recommend throwing some seeds in there so that you can make some money off the field. Maybe grow some coffee plants and then sell it to others in exchange for gold or silver. Gold is an inert metal, so it shouldn't harm the plants. I not sure about silver and copper. I know for sure that too much copper in your body is not good for you.

Gold Prices Going Down

Gold looks like it's going down. When Ron Paul was starting to get popular, gold prices went up considerably. Many were saying gold would reach US$1000 per ounce. Some were saying it would go up to $1500 per ounce.

Most of the gold nuts were those with a conspiracy theory background. They believed that governments were corrupt and couldn't control inflation and thus leaving your money in fiat currency was dangerous. The answer would be gold.

Gold is used as a store of value because of its properties. It is malleable, it has consistency of quality, it is scarce, and so on. But otherwise, gold, unlike oil, doesn't really have any useful purposes. Dentists can use gold for fillings, but there are substitutes.

Many people say gold is a disaster hedge. I would imagine if there is a collapse of civilization we would be trading in gold or at least the consensus would be that gold would be the new standard currency. But I'm not sure. In the event of a disaster, e.g. a collapse of the global financial system, wouldn't it be better to have a tonne of potatoes or rice rather than a tonne of gold? You can't eat gold. Of course, potatoes or rice may perish after a few years while gold lasts forever. Plus if gold becomes the new post-apocalyptic currency you can purchase rice from other survivalists with your gold.

One of the major problems with gold is that gold does not do anything. If you invest in a company by buying its stock, you can expect this company to do something useful--e.g. Coca Cola will sell Coke to people--and make profits. These profits are distributed to shareholders like you and me through dividends. However, gold doesn't do anything. It is a useless, pointless piece of metal. As such it has no future stream of income and therefore has no present value. You buy it only for speculative reasons, that is, you buy it because you hope the price will go up.

Some argue that gold is not going up because it is more valuable but because gold is priced in US dollars and the US dollar is suffering from inflation at the moment. The ultimate measure of gold then is not the nominal measure whereby we measure the value of gold in terms of US dollars but measure the value of gold in terms of its purchasing power, that is how much useful goods we can buy with that gold.

I suspect that many of those who try to encourage others to buy gold are those who want to engage in a practice called pump and dump. They hold heaps of gold ETFs and then go on Internet boards saying things like, "It's the end of the world! Buy gold!" Then all the scared people buy gold, prices go up, and then once these gold ETF holders see the value of their gold rise they dump it and make a quick profit. Making a profit off those inclined towards conspiracy theory is nothing new. David Icke has been doing it for years and he makes a lot of money.