Is gold finished? Are these last few months gold’s death knell? Hardly.
While the dollar has been the reserve currency for the last forty years, gold has been the world’s “reserve currency” for centuries. Its undoing will not be at the hands of the Federal Reserve Bank and a hodgepodge of fiscal policies cobbled together by elite banking intelligentsia. Gold has an enduring value that supersedes the short term goals of Ben Bernanke and his cronies.
During the late 90s, the value of an ounce gold dropped to under $400 and buying gold was considered a foolish play. It had hovered at or slightly above this level for years, without much appreciation. But speculators and investment analysts alike forget one thing: GOLD IS NOT AN APPRECIATIVE ASSET.
It’s not supposed to appreciate. It has and will HOLD value. While stocks and bonds are ruinously devalued by the effects of inflation, gold is not. Gold holds value. Gold is a hedge against inflation. It’s most effective use in a portfolio is as a secure value maintenance device. It will hold value for long periods of time…decades, and perhaps centuries…
Take this example: The cost of a good suit in 1900 was near $16.00. Throw in a shirt, suspenders and a hat and you have a fairly well outfitted business man. He’s out the door for about $20, or the price of one ounce of gold.
Forty years later, just before the war, a gentleman’s outfit costs slightly more. The total for a man’s suit and shirt would be closer to $30 for the ensemble. And indeed, steady as ever, the price of one ounce of gold in 1940 was about $35 an ounce.
Fast forward to the present and a man can still be well equipped to enter the world of business (at least so far as fashion is concerned) with a suit, shirt (and if needed, a tie) for less than the price of an ounce of gold. In fact, it could be argued that a very nice suit is available for under $1000 and the price of an ounce of gold more than covers that cost. You could actually buy a cheap pair of shoes as well and have cab fare left over.
This simple illustration points to the fact that gold is not intended to be a path to riches with each ounce doubling and tripling in value as the years go by. Instead, our example of the well-dress businessman demonstrates that gold retains its value better than the dollar. By contrast, when subjected to monetary policies now in place, the dollar is EXPECTED to lose value. It loses value by design.
Federal Reserve policies are intended to dilute the value of our currency. Devaluation is an anticipated byproduct of a policy that inflates supply of a any product. (or in this case, currency) It is the Fed’s mission to allow for “low but stable inflation.”
SO GET THIS STRAIGHT: FED POLICY IS TO CREATE INFLATION – WHICH EATS AWAY AT YOUR DOLLAR.
This is essentially the same as saying part of the Fed’s role is to reduce the value of your savings and investments. Seriously. It is their mission to ensure that SOME inflation occurs, and inflation erodes the value of your dollar-based investments.
In conclusion, gold will always have a role to play in the investment portfolio of any investor. It is one of the only investments that has demonstrated an ability to stave off the effects of inflationary erosion of dollar-based equities (stocks). The falling price of gold is not a signal to stop buying. It’s an opportunity to accumulate at lower prices than we’ve seen in several years.