Nervous investors the world over have many questions on their minds. A question that is attracting more and more attention is this: When considering Gold Investments - Will Gold Continue to Rise? At over $1400 an ounce, we are in uncharted waters to be sure. Right now, this question carries much more importance than whether or not now is a good time to buy gold...it signifies the faith, or lack of faith, in the World's economies. If you have no idea about what I am talking about....you really need to keep reading.
For regular readers who have a fairly deep understanding of the economy, financial markets and how precious metals interact, bear with me for a minute. If you are new to much of this, you need to know a few facts:
Gold was money for roughly 5000 years.
When current world governments substituted paper for money, its value was only accepted as a "note" that could be exchanged for gold anytime the holder of the note wanted.
The government set the relationship or price between these "notes" and gold. For many years, that rate was between $20 and $40 an ounce. One ounce of gold could be "swapped" for this government set "official" price in dollars.
The governments needed to keep gold in reserve in these ratios to the dollars they could print and spend. If the national budget was say 20 billion dollars, and the official price of gold was $20 an ounce, the government was supposed to have stored 1 billion ounces of gold in reserve. i.e... The Gold Standard.
The first official act to loosen the rules and allow the officials to spend more without collecting any more real money to fund the spending would be to change the ratios by changing the official price of gold. If they had 1 billion ounces of gold in reserve (many believe long before this they stopped following these rules and stored less than they were directed to by law), and they changed to an official price from $20 to $30, they just added $10 worth of value to their supposed holdings of 1 billion ounces of gold...presto-change-o, $10 billion dollars of extra cash in their coffers.
Eventually the government officials became less able to say no to anything and instead, changed the rules, eventually ending with President Roosevelt removing the US dollar from most of the gold standard during the Great Depression in 1933 while making it illegal for a US citizen to own most kinds of gold. In 1971, President Nixon finished off what little relationship left between how much gold the Federal Reserve needed to have in reserve to back the amount of dollars they could print. Now they were free to decide - if they needed more money, officially raise the debt ceiling, then just print some up. Gold was officially not money anymore.
So, now knowing that Gold is not money and not directly tied to it in any formal way, when considering gold investments, will gold continue to rise?
But wait a minute. If there is no relationship between gold and the US dollar, why has Gold been rising in the first place and who cares? It is a precious metal and by definition this means there is not much of it and it seems to be something people want to own. Unlike other precious metals like silver, palladium, rhodium, etc...gold is not used in any manufacturing. There is no need to acquire more of it for increased production in other products - this is not what is driving up gold's price. There is most definitely an increase demand that is a component of gold's steady rise in price...but why and from whom? Other than jewelry, and an occasional tooth filling, could that be it...more cavities and bracelets? No.
In fact, the more "traditional" investment crowd who consider stocks and bonds as "real" investments would argue that there is no such thing as gold as an investment any more than they would consider lumber an investment. This is the common front presented from Ben Bernanke, the Chairman of the Federal Reserve, on down to your local banker and stock broker. Yet...gold's price just keeps on rising. Whether you agree that gold is an investment or not, buying gold at any time up a short time ago and holding it would have been a great investment. Even from its previous unheard of high during the last period of great inflation in the 1980's of over $800 an ounce, if held, would offer you today an approximate 75% return.
So, let's review for a minute.
Gold is not money nor is it tied to money anymore. Governments and banks do not need to have any in reserve anywhere in the world. It is not an industrial metal that is in demand to produce other things people are buying. The majority of the investment world laughs at the idea of gold as an investment. You can't buy gold easily and stick it in your IRA (there are gold IRA's where companies offer to buy and store gold for you at their location...but it is difficult to set up and often not allowed in company sponsored retirement plans.) In a global market decline like we have been living with since 2008, could it be greatly increased jewelry purchases? In some countries, India and China to name a few, there is increased demand for these products but no way near enough to drive these price increases....so, what is up with gold and should you even care?
I know the answer. I know the answer and it may surprise you.
It has to do with two words that in many ways are exact opposites. In the Christian Faith, these words are defined as exact opposites. Where one exists, the other cannot. They are Fear and Faith. The bible exhorts us more than 100 times to "Fear Not", "Do not be afraid". Great fear was a sign of little faith....and there you have it; only in reverse. No faith has a tendency to produce great fear. Even those who know and understand little about the depth and breadth of our global economic problems know enough to be afraid. And with good reason. There is no good reason to have faith in our current monetary system. It is based on nothing really....pieces of paper. As long as everyone agrees to accept them in exchange for things you need, everything moves along. Once large numbers of people lose faith in that value, they become worthless in an instant. Any recent reasons to worry about that? Iceland's currency was the world's darling only two years ago...then it collapsed... Greece, Portugal, Spain! The United States government and the Federal Reserve's unprecedented effort to inflate their debt away by printing more money in the last two years than in the entire history of the United States combined.....COMBINED!
The ONLY reason there has not been a complete collapse of the US Dollar just like Iceland's Krona is its enviable position of being the world's reserve currency. But even that will not hold forever. Should the countries that hold the majority of our debt lose faith in the dollar and sell their holdings...new purchases would slow down or cease as others would see the amount of dollars for sale from previous buyers and the dollar will have no support and be left in the dust. There is evidence that this is slowly underway now. If you held a lot of dollars, like say China does, they couldn't sell too many of them at once or risk devaluing their remaining holdings. Add the entire Middle East and what it is doing to the price of oil; food and other commodity price increases...wow - there are plenty of reasons to be concerned. I know in my 55 years, I have never seen so many forces working like this ever - it's like the making of a perfect storm. Fear masked as concern abounds...but what about faith? If you agree with me on the relationship between fear and faith, then an answer to fear is faith.
To make my final point, put yourself in the middle of the following story....
You live in a world where your currency has imploded. There is no faith in the government that you now clearly see created the problems that led to the collapse. You need to get through this. You are in the enviable position of being a chicken farmer. Since there is no common currency, you now are forced to take that which you have that others want and trade it for what they have that you want. Someone comes to you who needs some food -some chickens, but they have nothing you need to live day to day; but they ask if you would take some gold. Even if you don't understand deep economic theories...would you? Yes you would. You would because what you really want is something that everyone recognizes as having value everywhere. Something that has stood the test of time...maybe 5000 years of time. You are looking for widely recognized medium of exchange. That would be gold. The reason the price of gold has risen is because of its broad acceptance as a likely alternative to economic uncertainty. And it is not just individuals who are driving this...but countries. Still less than 5% of Americans own any gold at all...and as we sit and think about it...China, who produces more gold than any other country on Earth, is selling none of it...they are keeping it all. Now what would a country that already owns more dollars than any other want with all that gold?
Gold Investments - will gold continue to rise? That's the question on the table. In my opinion - until real economic progress is made in the form of reduced debt and currencies that are tied to value that cannot be easily manipulated by selfish politicians...YES! - You bet it will.
Steve Peters brings over 24 years of business, financial markets and gold broker experience to help new or unsure gold buyers avoid the mistakes so many make. Go here to read more: Safe Gold?
More detail on current economic conditions can be found here as well: Economics 101
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