Why Gold Prices Will Continue Rising

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Includes: AGOL, GLD, IAU, PHYS, PSLV, SGOL, SLV, UGL
by: Mark Thomas

As investors ever since 2008 we have struggled to understand the dramatic events in the financial markets, their underlying causes and effects and the extreme volatility that they created. More importantly, how will these future events play out so that we can protect our wealth against losses and hopefully profit. Beginning in 2008, our financial system as we have known it in our lifetime began to crumble. Now in 2011, the second phase of these events is unfolding and becoming more obvious as every day passes. I believe we are in the second stage of a lengthy process I call “The Golden Mean Theory.”

The Golden Mean theory states that gold prices have regular periods throughout history, when gold prices do a dramatic and an eventual rapid revaluation that does an accounting for all the excessive past currency and credit creation over time, since the process last occurred. When it occurs a country's entire gold reserve will soar in value until it equals or exceeds all of that respective country’s outstanding currency and revolving credit available. That is when the "Golden Mean" is finally achieved. At that point, it again becomes possible for a country’s currency system to be replaced and revert back to a true gold standard. Most governments then ignore this opportunity and by not making the right choice to return to a gold standard, they doom their economy to the same boom and bust cycles and the process occurs inevitably again years or even decades later.

The Golden Mean process is an extreme transformative event that ripples through all financial markets. It is a free market process that is inevitable and the only question is when, not if it will occur. It can be brought about more rapidly by poor monetary and fiscal policy but it can’t be avoided. When this lengthy multi-year process occurs, gold prices soar in value by a factor of hundreds of percent and all other paper financial assets will decrease in both nominal and real value. Investments can lose value in two ways, obviously they can fall in dollar price quoted or received when sold. More importantly because the paper assets are denominated in declining currencies, they lose substantial purchasing power over time and that is a real loss. Therefore even if paper investments don’t outright decrease in value, their real purchasing power is eroded no matter what their nominal price performance. Gold is the only asset that during this time period maintains its purchasing power and even profits from this extreme financial chaos.

The Golden Mean process only occurs when currencies are not fully backed by gold. It can occur also when a country dilutes the value of a gold-backed currency by printing too much of it relative to actual gold holdings. All major currencies in the developed and larger economies today aren’t currently backed by gold. That helps make this process occur more frequently than though history. Also the developed world economies and governments have so dramatically abused their privilege of credit and monetary creation by ever larger factors since the last time the process occurred. These factors will all combine to magnify the eventual rise in gold prices.

The irresponsible central bank and government policies are the true cause of this process. Just look at the United States with its increasingly unmanageable total Federal Debt outstanding, annual deficit, trade deficit, lack of personal savings and unfunded entitlement liabilities. However this abuse of a currency can’t go on forever and when confidence in it begins to crack, there is nothing that can stop it from eventually coming to a crescendo conclusion where the Golden Mean will be achieved again. They can temporarily arrest the process but those steps only add to the magnitude and eventual pain inflicted to complete the process.

During this event, which can last years and even up to two decades, there is only one way to protect yourself from the erosion in value of your wealth that is happening and will continue to occur. That is to have a very large percentage of your investable assets like (50-100%) invested in gold or silver. I believe in this theory so much that I have sold all of my stocks, bonds, currencies, money markets and cash equivalents. I then placed 100% of my investable assets in gold in mid June 2011, at around $1550 per troy ounce. I also then started a web site devoted to this subject that offers regular updates about this subject and is solely devoted to the gold market as this process unfolds.

I personally prefer (and suggest to others) investing in gold because while it might offer less potential upside than silver, it is strictly a precious metal and not an industrial metal, that can be affected by cycles in the economy. Because of this Golden Mean process, gold currently is reasserting its status as the world’s only true reserve currency. All other “fiat” currencies lack the most important feature a currency must contain, a true store of value. Gold does contain a store of value feature. That aspect doesn’t guarantee that your money is safe and will only go up in price. However never in the history of mankind has gold been totally worthless. That can’t be said for any stock, bond, currency, derivative or any other financial instrument man has devised. That is because all of those financial instruments in the end are someone else’s liability. Therefore you are always exposed to an unquantifiable counter-party risk at any time.

Disclosure: I am long GLD, IAU, SGOL, AGOL, PHYS, UGL, GTU, CEF, SLV, PSLV.