When we do a class on debt markets one important class is that of Debt Rating.

There we say the highest and the best borrower is rated AAA. However we do not even ask – the Sovereign debt is not rated. It is supposed to be above default.

When the Japenese companies were running huge surpluses they invested in US bonds at the rate 1US $ = 350 Yen. Now 1 US $ = 85 yen. Has the Government of US defaulted? No of course not, but they have taken the bottom out of the dollar. How was this possible. Because they suddenly said ‘Our dollar is not connected to the Gold’ .

So governments do not default, but they make their currency useless. In the current form, the US government WILL default (anyway they are each tree that they have for a billion dollars – just by printing notes).

One day the rest of the world is likely to say ‘Please give me goods, not your toilet paper’. A few friends in US tell me if you use purchasing power parity theory, the rupee dollar rate is more like Rs. 12 to Rs. 15!

Well it may not be far away when you say here is a Yen, give me a dollar!

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  1. paper money finally(always) returns to its fundamental value -zero.
    we have been in a wiley coyote monetary system for a while now.we’ve already jumped off the cliff ,as in the cartoon.we’ve not realised it yet.
    btw,the US govt did default in 1971 when it cut off the connection to gold. reneging on promises made is a default.inspite of the verbose legalese and shameless academic backing it may have got.

  2. Very funny take on gold. In 1975 it was $ 750 US. At 10% p.a. growth over the past 35 years, the price of gold should have been about 21,358 US $. However it is at 1250 and people are worried. Let us say it reaches $ 2000, what will you do? Sell or buy?

    Well in an asset like an equity share the underlying asset is a business which is dynamic and making money. However gold is always a ponzi. Is gold the new Tulip (or the new ULIP, Lol!!) we do not know.

    There are enough reasons to buy gold and more than enough reasons to be selling gold. Best is if you think it is a bubble, stay away.I have a very small gold portfolio + my wife’s jewellery.

    Am I willing to buy gold? NO. Am I willing to short gold? NO. never. When there is a bubble it is possible that it would reach 21000 and then come down to 800 $.

    Best advise? Stay away.

  3. 750 in 1975?.why not start with 35 in 1973. if prices rice parabolically it is probably unwise to buy. do the long term charts for gold show a parabolic rise?
    gold is an act of distrust of the govt.equities can also have humungous bubbles.btw,if you start from 1992, we are barely 3x times for sensex.so,choosing when you get in is important.its silly to get in when everyone is crazy about it. the fact that financial advisors are still mainly skeptical about gold just shows that there is no real mania.academics love to trash it and financial advisers apply cash flow techniques to evaluate gold as a commodity.thats like valuing sliced and diced mortgage packages as AAA .
    gold is always a ponzi? a 6000 yr old ponzi?.only,if you want to ignore the evolution of civilization and money

  4. Dr Mohammed Ali Khan

    Gold is NOT a commodity..
    It is a currency..
    The most ancient, trusted and perfect tool of exchange ever devised by human civilization.. Its been used since the dawn of human civilization as a tool of exchange.. All these fiat paper currencies have NO intrinsic value..
    Just like people shift from Euro to Dollar percieving Dollar to be a safer currency.. Some people are shifting to an even more safer currency .. Gold !!

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