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Commodities for Every Portfolio: Part Three
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The word "money" is defined as a medium of exchange that is able to preserve wealth. A "medium of exchange" is simply something that is widely accepted to have a certain value and that can be exchanged for goods or services. The U.S. dollar, for example, is a medium of exchange. You can easily transfer the dollar to other individuals because it represents a certain value that will allow you to purchase food, clothing, or a variety of goods and services. The same is true about gold. While you cannot use gold to purchase some of these goods and services directly, you still can use it to purchase dollars or any other currency. Then you can use the dollars to purchase your goods.
Consider, for instance, this scenario. Every month I get paid. In return for my time and labor, I receive U.S. dollars, which provide me with the value necessary to pay my bills and any other expenses. Once I receive the money, instead of putting it in the bank, I decide to go to the local coin shop and purchase some gold coins. Now let's assume that a year later, I decide to purchase a new car. I will then take the gold coins to the local dealer, convert them to U.S. dollars, and take the dollars to the dealership where I can purchase my vehicle. In this case, did gold serve as a medium of exchange? Of course it did.
Now, if gold was not widely accepted and I had the difficulty converting it into a local currency, things might be different. However, this is not the case. If I were to purchase gold in Newport Beach, California, get on an airplane, and fly almost anywhere in the world, I would most likely be able to find a jewelry store, a bank, a coin shop, or even a local resident that would be able to easily convert the gold into the local currency. Why would they do this? Well, because they understand that gold is money and it represents wealth. More important than the fact that gold represents wealth is the fact that gold preserves wealth. This is the second part of the definition of money. If you recollect the brief history on gold, the price associated with an ounce of gold has changed considerably over the last several hundred years. In 1837, one ounce of gold was priced at $20.67; in 1934, it was priced at $35; in 1973 it was priced at $42.22; and in 2006 it hit a high of $720. The general trend has been higher gold prices over a prolonged period of time.
This point might not seem extremely relevant when you look at things from a short-term perspective, but it is extremely relevant if you are concerned with preserving wealth. Consider, for instance, the option to purchase an ounce of gold in 1973. The amount that you had to pay was $42.22. At that time, you could spend the $42.22 and purchase an ounce of gold, or you could simply hold on to the money. The difference between the two options is pretty substantial. In 1973 $42.22 could buy a lot more than it could buy today. Today it might be able to purchase a dinner for two at a local restaurant. In contrast, you would have been able to convert an ounce of gold to $720. This amount would be equivalent to 16 dinner-for-two meals or enough money to buy some higher-priced items. Even more significant is that this amount would more clearly represent the wealth that you had accumulated in 1973. By holding on to an ounce of gold, you were able to preserve the value of your wealth. Unfortunately, the same could not be said had you simply kept the $42.22.
The above is an excerpt from Part Three: Strategies to Profit from the Commodity Markets. The following chapters make up this section:
Chapter 9: Commodity Trading Strategies
Chapter 10: A Managed Approach: Managed Futures
Chapter 11: The Case for Gold in Your Portfolio
Chapter 12: Leveraging Third-Party Assistance
Chapter 8: Participating Through Exchange-Traded Funds
To find out more about Commodities for Every Portfolio: How You Can Profit From the Long-Term Commodity Boom, please click here.
Emanuel Balarie
CEO, Jabez Capital Management
Editor, www.commoditynewscenter.com
Excerpted with permission of the publisher John Wiley & Sons, Inc. from Commodities for Every Portfolio: How You Can Profit From the Long-Term Commodity Boom. Copyright (c) 2007 by Emanuel Balarie. This book is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com, or call 1-800-225-5945.
