ABG

As Good as Gold?

The author of this article is using a selective time period, from 1980 to now. Suppose we used the increase in the NASDAQ stock market from January 2000 to now? We would see a whoppingly big negative return from stock investing! Why not start the gold analysis in 1970, ten years before 1980, when the inter-governmental price was fixed at $35 per ounce, but gold was selling in the free market in Switzerland (Americans were still prohibited from owning bullion) for about $42.00 per troy ounce? That would be a far more accurate time period of 38 years and would provide a better analysis of the investment allure of the yellow metal.

1980 was an exceptional period of time of fear and high inflation. Gold and silver (the latter helped along by long oriented market manipulation) ran up very high on the fear factor. But, the period from 2000 to 2007 was not filled with economic fear. In fact, it was a period of slow dollar declines, relative calm (except for 9/11), low inflation and steady growth in the general economy and in the financial markets. Yet, gold soared from $270 per ounce to $670 or so, during that period of time.

Now, in spite of the fact that we are clearly on the precipice of heavy dollar devaluation (the Fed, for all intents and purposes, admitted last Tuesday that it intends to inflate America out of its debt problems), gold hasn't yet made much of a move. Given the environment, where the dollar is relatively certain to drop like a stone thanks to the Fed's "quantitative easing" program, a 5% per year reduction in mine production in spite of what should be the stimulus of huge price increases, and with demand increasing exponentially all over the world (except at the futures exchanges!), it seems to me that gold, at least at the price for which it can be purchased on the futures markets, is now very low priced and a screaming "BUY" even for those with a shorter-term investment goal of maybe 1-2 year horizon.

I would note that silver has collapsed even lower, and this collapse is completely irrational. Most rational folks among us were jumping on the $9.00 per ounce silver price last month, for example. They aren't making any more of it, and mine production has come to a standstill now. It is bound to have a price explosion soon.

In short, I think the author is very wrong about value of gold in the current economic environment. In all likelihood, given the circumstances of dollar depreciation, as well as shortages of mining supply as well as the end of central bank willingness to lend out large quantities of gold, and China's desire to purchase 3,600 tons of it as soon as possible, the yellow metal is bound to rise in a fast but sustained way.

Gold prices may eventually exceed the rational price, but it is currently no where near that. Logic and reason tells me that the top is probably several years and thousands of dollars per ounce above where the metal is now selling. So, frankly, I will be continuing to buy, at least until the price is several thousand dollars per ounce higher than now.