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Is gold still good? For many investors, the answer is a resounding “No!” but that
doesn’t answer the question: Is gold still good?
So writes Steve Mauzy (www.wyattresearch.com) in edited excerpts from his original article* entitled Read This If You’re Worried About Gold.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Mauzy goes on to say in further edited excerpts:
First, it’s important to understand gold. Gold is not an investment; it’s not a commodity. Gold is a store of value, and that’s the way it should be viewed. From a portfolio perspective, dollars are allocated to gold to maintain long-term purchasing power.
Gold has been a store of value…[for] centuries so, despite the short-term price decline, gold, in my opinion, is still good. I say that because Western countries are awash with debt: the United States’ debt-to-GDP ratio stands at 73%, the United Kingdom’s ratio stands at 89%, Germany’s stands at 82% and France’s stands at 90%. Japan’s ratio stands at an unconscionable – and unsustainable – 214%. Much of this government debt has worked its way onto central-bank balance sheets. The central banks purchase this debt with newly issued money; thus we have record levels of money circulating through the economy.
The graph below, constructed by the St. Louis Federal Reserve Bank, shows the surge in currency and demand-deposit (known as M1) stock in recent years.
Each new dollar that enters the economy reduces the purchasing power of the dollars outstanding. This is an easy concept to grasp. If there are a billion dollars circulating through the economy one day and the central bank doubles the amount to two billion dollars the next day, what cost $1 one day will cost $2 the next, holding all other variables constant.
In the real world, of course, all variables aren’t held constant, so the relationship between price increases and money supply is less direct. Many other variables – such as demand, supply, productivity, money flow – also figure into price but over the long haul, prices rise with a rising money supply. Also over the long haul, gold prices rise with both monetary and consumer-price inflation.
Compare the graph of money supply above with the graph of gold prices below. The overlay between money supply and gold prices isn’t perfect, but over time the trend and the correlation hold.
Admittedly, Western governments could begin to balance their budgets and return to sound money practices. In that case, gold would lose its utility as a store of value against the dollar, the euro and the yen but what are the odds of that occurring?
Spending garners votes. If you can spend with impunity, which every politician does, why stop? You don’t, which is why deficit spending in the United States is expected to remain above $1 trillion indefinitely.
Concurrently, the Federal Reserve is unlikely to throttle back on QE3, at least this year, especially when you factor in real gross domestic product growth, which was unexpectedly revised down this week to 1.8% from 2.4% for the first quarter.
Moreover, if the Fed were to remove or reduce money growth, the free market would once again dictate bond yields and stock prices and there is a very high probability the bond yields and stock prices that prevail today wouldn’t prevail tomorrow.
Conclusion
Yes, gold is good. That is, it’s a good long-term store of value, and will remain one for the future. That said, gold could still be a bad short-term trade so buy gold with an eye on the distant horizon, not the tip of your nose.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://www.wyattresearch.com/article/as-good-as-gold-but-is-gold-still-good/30001 (© 2013 Wyatt Investment Research & Business Financial Publishing LLC)
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I believe that we are now in a period that is unique in history, in that the Central Banks and their Governments are working together as never before, to push the value of PM’s downward in order to prop up their continued printing of ever more “flat” money (aka paper money) that in reality now has little actual value. I see this “united effort” as an agreement between these same Central Banks that will allow them some additional time to re-position their own holdings, so that they all can not only add additional PM to their own holdings (at a discount) but at the same time remove as much PM’s as they can from as many small to medium investors as possible, which will make PM’s even more valuable in the future since most of it would then be held by these same Central Banks.
A great analogy is the children’s game of Musical Chairs, where everyone is happily going round and round at the beginning of the game but they all know that at some point soon the music will stop and those without a chair to sit in will be out of the game! I see PM’s as being just the chairs, when the current financial music stops, those without PM’s will be left holding nothing but paper money and history is full of examples of paper money suddenly becoming worthless!
Adding to this situation is the fact the these same Central Banks are now still adding Gold and/or Silver, at depressed prices, to their own portfolio’s, which should be seen as giant waving red flag for all investors, because they are telling us one thing while doing the exact opposite thing themselves! In reality, they are just issuing statements supported by ever better looking charts, illustrating numbers being generated by these same Central Banks/Governments, in the MSM to justify the value of their own “strong” currencies (while at the same time allowing only their Biggest players to use newly printed paper money to short PM’s value).
Question: If you are playing poker in one town and you are starting to think the game is rigged, do you really want to end up holding only the House’s chips that are good in just one town or something of real value like Gold and Silver coins which are accepted in every town or some of both?