The gold rush of 2010
We’ve been hearing a lot about gold over the last few months, related to concerns about inflation, the creditworthiness of various governments, and fallout from the financial crisis—all against the backdrop of what is the most significant increase in inflation-adjusted gold prices since the early 1980s.
The chart below is my way of putting gold prices in perspective.
Over this entire 140-year period, the average price of one ounce of gold was $480 (in 2010 dollars). If the gold price remains stable through the end of this year—not a given by any means—there will have been only one other year in the last 140 (1980) in which the inflation-adjusted average daily price of an ounce of gold was higher than in 2010.
In other words, there was only one year in the last 140 when it would have cost you more in terms of foregone alternative goods and services to become the owner of an ounce of gold.
These data show that during some periods of extreme inflationary or broader economic distress, gold prices have increased sharply, only to recede back to lower levels as things return to normal. For example, from a peak of $563 in 1934 to a low of $201 in 1970, the inflation-adjusted value of gold declined by 64.4%. This is an annualized rate of decline of more than 1% per year over a period of more than 35 years. The inflation-adjusted price of gold was higher in 1871 than it was 100 years later in 1971.
Bottom line: Any value that gold has as an investment appears, historically, to have accrued to investors who had a position prior to certain episodes of economic or financial distress. And to generate truly eye-popping returns from a gold-based strategy, you’d have needed to be selling at the peaks of these past price spikes, not buying.
The basis for making an investment in gold now is a conviction that the worst is yet to come. I’m not saying it can’t happen. But looking at how far these prices have come already, and thinking about the kinds of truly disastrous events that are included in this 140-year period, I’m skeptical.
Note: In the chart above, gold prices are based on the historical “Yearly Average Prices” of the London PM Fix as reported by Kitco. For 2010, the figure used is the year-to-date average of daily data through July 14, 2010. For the period 1871–1912, Consumer Price Index data are the annual average of monthly CPI values reported by Yale economist Robert Shiller. For 1913–2009, the data are annual average numbers from the U.S. Bureau of Labor Statistics. For 2010, the number is the average of monthly values through June 2010. Links to the sites mentioned here will open new browser windows; except where noted, Vanguard accepts no responsibility for content on third-party sites.
I own some gold and some silver in the form of coins. I consider them to be another class in a diversified portfolio of assets. They represent only a minor fraction of my total assets and are there “just in case”.
Its good to be skeptical, but wise to make a part of a diversified portfolio.
The whole gold rush is another instill fear scam. Every talk show and day time TV commercial has a front man selling gold. Would you buy gold from G. Gordon Liddy?
Bottom line - it you buy at an all time high - you must believe the world as we know it is about to end. If so, gold won’t buy bread anyway. Just in case of what? Melt the silver down to make spoons?
Another thought - with the buying frenzy - someone is getting wealthy on selling! Who?
Also - the “limited” coins sell for higher than value by weight when you buy them - can you really sell them and recover the premium - I think not - where to sell - ebay or some high commission dealer.
If is too good to be true - it’s isn’t Buyer beware - if you like gold buy and ETF or metals fund.
Years ago, an older coworker, a glider pilot in WWII, spoke about what he thought about gold. His father had been a school superintendent in Tennessee during the Great Depression. The county government had no money and had to pay in “Scrip”. Some merchants would honor the scrip but most would demand a premium. Some “Money Men”, as he put it, would buy scrip at a considerable discount. Gold was not a factor, he went on to say, what was important was cash money. “Gold”, he liked to say, “just lies there”. So, what was important to someone who was there during our worst financial crisis was liquidity. And folks, how do you like the interest and dividends from your gold? Also if you take custody of the actual metal; do not unwrap it or you will probably have to pay someone to verify its purity.
What is the corelation between golds price and inflation. Some people profess that golds really price should be over $2000 per ounce with true inflation factored in?
Given where gold is, and the fact that it is no longer just “gold bugs” that own it in one shape or form or another, I suspect I am not alone in thinking that the worst is yet to come. Keep in mind the unprecedented amount of easing on the part of the Fed, to no significant effect, and keep in mind the amount of budget deficits Uncle has been and will continue to run.
As long as the governments all over the world keep printing paper money, Gold and Silver will be attractive as it has been for 5000 years.
When is the last time you saw a S&P chart in adjusted dollars? You don’t, that only gets applied to gold. DOW 10k first happened in 1999, it is now 2010.
In the last 10 years gold has gone up about 400% vs. DOW 0%.
Think about it.
It would be interesting to see how a composite of gold stocks or gold mutual funds (as opposed to the value of the metal) had done over time. My guess would be that they performed better.
Hey John, how about being a good fellow and popping that gold bubble? I need to buy some more Sovereigns and Krugerrands
Anyone who treats gold and silver as “investments” is crusin’ for a brusin’. On the other hand, as a bit of hazard insurance in an otherwise balanced portfolio, they are hard to beat. Any serious investor with a weak stomach and wishing to build a close-to-bulletproof portfolio shouldn’t ignore Harry Browne’s work.
First, the article ignores another strategy: gold-based stocks and ETFs, which are leveraged to the price of gold, but also to the stock market generally. With these, one is not necessarily betting that the worst is yet to come, because they go up when stocks go up. Also, the chart, while normalized for inflation, is not normalized for stock prices. In 1982 (start of bull market), gold cost roughly $800/ounce (in nominal dollars) and the Dow was at roughly 800, for a ratio of 1:1. In 2000 (start of bear market), gold cost roughly $300/ounce and the Dow was at roughly 13,000, for a ratio of 43:1. Currently, gold is at roughly $1,200/ounce and the Dow is at roughly 10,000, for a ratio of 8:1, with gold having outperformed stocks for the past decade.
Given that we have printed more money than in 1982, we had a deeper recession than in 1982, and we have exponentially more debt than in 1982, is there any reason to think that we would not return to 1:1? If we do, that leaves plenty of upside for gold. Also taking a longer perspective, an average portfolio of gold-based stocks has returned 8.4% since 1/2/1987 after fees, as opposed to 6.1% for the S&P 500 (after index fund fees) during the same time period. Most of that period was characterized by bull market, so a bet on gold stocks again wasn’t a bet that the worst was yet to come.
There is no reason why the ratio I mentioned couldn’t return to 43:1, but there is no reason it wouldn’t revert back to 1:1 first.
I get a kick out of G. Gordon Liddy crumbling up the dollar bill and saying cash is no good. Then sells you on buying gold. Of course what he wants in return is your cash.
Interesting perspectives, but quite naive and provincial………When has the United States government ever been so reliant on foreign governments to keep us solvent? NEVER………if any major owner of Treasuries decides to pull the plug, and it’s not a remote possibility considering miniscule real returns and the declining value of the US $, the game is over and the US will go the way of the Weimar Republic. I’m keeping my gold and buying more on dips……..and sleeping like a baby, too!
The highly promoted rush to buy gold is another case of finding “a bigger fool.” Like buying tulips, you can make money as long someone else comes along afterward willing to pay more. But the promoters talk about “the coming inflation” as the reason to buy gold. If inflation is your fear, change you asset class from cash or cash-equivalents. Or why not buy TIPS instead of gold? That is a direct hedge against inflation without the worry of speculation.
Good historical work but we’ll only be using 2010 dollars for 5 more months. The USG either defaults on or inflates away the - everyone agrees- unsustainable debt. Is there another option? Just about all commodities are in long term uptrends (the Vanguard way) for this and other substantial reasons; why single out gold to buck the trend ?
Not to mention any effects of the ever deteriorating “peace” situation and good olde supply & demand fundamentals.
I do agree that stock selection in the Precious Metals fund could be more effective.
You can’t really compare USD and Gold when the chart is adjusted for inflation. I think that misses the point?
Anyways I read that a large portion of annual gold production is consumed by Indians. So actually the whole market is dependent on wedding presents in India. How can anyone think this is an especially safe investment for hard times? You might as well buy some Indian government bonds. Just as dependent on Indian economic health, and you’d get some interest.
If one had invested their “gold money” into a good total stock market index fund instead of gold, perhaps it would make gold look like a poor investment return in spite of its recent up tick.
Gold is only disaster hedge insurance anyway, probably dwarfed by guns, stored food and survival knowledge if you want to examine all the possibilities, a source of good clean drinking water would probably be the most valuable thing you could have in times of disaster.
Regards
There are a couple of problems with Mr. Ameniks view. First the USA was on the gold standard until 1971 and the price was held arificially low. So his comparison is flawed. Second with each passing year the country is closer to going broke. This means we have to inflate our way out or cut spending on entitlement programs. Both will cause a lot of trauma resulting in a high price for gold and silver. Gold should be thought of as insurance and be held for protection. As far as holding dollars every day you hold them they buy less. Just look back 10 years and see what a dollar would buy then and what it will buy now.
I have been a Vanguard investor since the mid 80’s, and enjoy following their commentary along with that of others.
There are several facts left out of the above commentary. First, from 1871 to 1971, gold was an anchor point for the US Dollar, with an exchange rate of approximately $35 per ounce in the mid 1960’s. When French President DeGaulle began sending paper dollars back to the US, in exchange for Gold, the charade was up. President Nixon faced the unpleasant choice of eliminating the US Trade deficit, or re-valuing the US Dollar downward against the price of gold to reflect the actual deteriorating situation. In August 1971, he effectively told the world to “stick it” and repudiated the US paper debt against gold, which has been a true form of money for over 5000 years.
Once the US Treasury eliminated the difference between the “permanent” and “temporary” debt ceiling, the way was cleared for a debt explosion. The current situation is dire. The bankers are not going to stand idly by watching the $300-$400 Trillion in losses be wiped out. Currently, the banks are conducting Quantative Easing. This will continue until at such time Gold will be revalued sharply upwards, The final act will be to deply the “nuclear” option for central banks and print unlimited quantities of money. If the latter happens, hyperinflation will occur. I hope we never see the latter…
The author writes: “The inflation-adjusted price of gold was higher in 1871 than it was 100 years later in 1971.”
The graph, entitled “Price of an ounce of gold 1871-2010 (2010 dollars, adjusted for inflation)” shows the 1871 price as about $375, and the 1971 price as about $1,625.
Am I missing something, or was an editor nodding?
What are your thoughts on a strategy that focuses more on the producers rather than the mineral itself? There are a number of atractive opportunities of strong companies that are weighted in other metals and their recent performance has been quite good, particularly following the announcement by China to increase its gold holdings…
I question that the CPI or any other contrived measurement of inflation is a more valid indicator than is the price of gold. To adjust gold prices for inflation when gold itself is likely a better measure of the value of the dollar is misleading.
Furthermore, never since the revolutionary and/or civil wars has there been such a high rate monetary creation. And this has been going on for some time, accompanied by inflation in various asset classes ignored in the CPI calculation.
I therefore believe that gold is not such a bad investment, despite its difficulties.
I would be most happy and anxious to buy a Vanguard Gold Fund. I hope the company will establish one.
The most relevant statistics is NOT the inflation-adjusted value of gold, but instead, the DOW:Gold index. The statistic can be seen at :
http://greenbackd.files.wordpress.com/2009/11/dow-gold-ratio-1900-to-2009.png
The long-term average is 10x (by this measure, gold @ $1200 implies a DOW at 12,000, so either gold is $200 over-valued or DOW is 2,000 points under-valued.) However, before there is “reversion to the mean” of 10x, there is typically an “overshoot”, and you can see that for decades DOW:GOLD has been less than 5x, i.e. 1900-1925, 1930-1950, 1975-1990. so we might possibly expect gold to go to $2034 (based on today’s prices) or DOW to go to 6,000 (more likely, imho.) In either event, if you pay careful attention to the overshoot, this is a tradeable trend.
I believe you could go back even further in your analysis. I believe that in the time of the Roman Empire, a nice home could have been valued at that time as equivalent to the value of a lump of gold at a certain size. Today, that same lump of gold could be exchanged for a pile of Federal Reserve Notes (dollars) to purchase…a nice home.
Gold has apparently had a relatively constant historic value in terms of goods and services.
Dollars on the other hand have had a precipitous drop in value. And why not? Dollars will most likely continue to trend to the long term average value of all similar non gold backed paper currency issued since 2000 BC, which is zero. For example, at 3 percent inflation, in 120 years one dollar will be worth a current one penny.
My impression is that gold is a good hedge against inflation. With our country’s overblown national debt, Inflation could take off tomorrow and move the value of the dollar to a current penny, making the dollar literally not worth the paper its printed on.
John is definately right in his assertions. I can remember when Krugerands were the thing to buy back in the early eighties until the Aparthide situation. Many of my friends bought into the gold frenzy at $1,000.00 or more an ounce. The bottom dropped out and until this recent surge, they’ve either sold at a loss or had to hold it for 20 or more years as the graph shows. The better way to invest in gold is to become a treasure hunter or prospector and become a seller as many of these companies that are selling gold probably bought when it was $200.00 an ounce IMHO.
A critical point here is the “adjusted for inflation” note. Continued rises in gold could simply be signaling anticipated inflation, e.g. to ameliorate the increased sovereign debts. How about showing a chart in real-time dollars?
I have never seen inflation adjusted gold prices for 1980 that were below $2,300/oz. That’s a far cry from the $1,600/oz. provided by the Department of Labor (?!?!??!). Given that, gold is at roughly half of its historic high.
These people always assume that the future will be like the past. The financial collapse recently was unprecedented, just as the risk of future collapse is unprecedented.
Things change, and to ignore that in your analysis is a mistake. The first lesson of history is that ever important event was a surprise to people at the time.
Gold is a great insurance policy, for that reason.
Do you think that trillions in deficit spending will increase the value of your paper currency?
Do you think Soc. Sec. will sudenly become overfunded? How about Medicare? Maybe the underfunded pentions. Maybe the prison system will suddenly find a way to save a bunch?
Oh! 30 odd states will , after all these years, balance their budgets?
Where am I going wrong here?
Mr. Ameriks,
Have you ever looked at the Debt Clock?
The French farmers buy gold and bury it. They don’t trust banks Since they have seen them fail. They dont trust money since they have seen it inflate and nationalize. They know they can always bring a gold coin into the market and it will have the same buying power as when they bought it. Obama is working on nationalizing the banks. Or am I wrong?
It’s well to make some objective comparisons between the performance of gold vs bonds vs stocks. We can use VBTLX - Total Bond Market Index and VTSAX - Total Stock Market Index as good proxies for the general stock and bond markets. IAU - Ishares Gold ETF is a good liquid proxy for gold. Here’s the approximate change in various time periods for each:
YTD 2010 - gold - +9.8%, bonds - +4.5% and stocks - +.5%
1 year - gold - +23%, bonds - +6%, stocks - +12%
3 years - gold - +75%, bonds - +9%, stocks - (-23%)
5 years - gold - +165%, bonds - +5%, stocks - (-10%)
So, what am I missing?
This can easily be verified using any of the stock and mutual fund comparison programs such as Google Finance. One caution is this does not include reinvestment of earnings - dividends and interest.
Have we forgotten the DJIA peaked above 14,000 in 2007? Apply normal stock growth rates to 10,600+- and see how long it takes to recover to 14,000.
Of course, past performance does not equate to future results.
So, you may want to ask yourself if anything relevant has happened lately that could influence future returns. I would recommend your research begin in 2008 to the present.
I highly recommend “The Ascent of Money” by Hoover Fellow Niaal Ferguson to enhance understanding of normal and abnormal markets and especially the role of commodities. Colonial Spain is the instructive case for commodities hoarding with their “rich hill”, Cerro Rico, a mountain of silver…
I view gold as another commodity and not especially a safeguard against the falling value of the dollar. I also believe that buying gold at this juncture leaves one vulnerable to its decline in value. In short, it makes as much sense to buy pork bellies, soybeans or other similar products without a hedge. The statement that “gold is never worth nothing” is no assurance that it will not drop to 1920 value.
Well, yes, I do believe the worst is yet to come inflation is yet to come. That’s correct, you’re right. A whole lot us do indeed think the fiat currencies will crash, as they rather consistently have done.
I look at the chart supplied here, and wish my Dad had bought gold in the Depression, or during WW2.
Yes, gotta stay balanced. Gotta try to see into the future too.
The chart and article misses the whole point of buying gold. Gold is an inflation hedge. Cash does not automatically adjust itself for inflation. That $400 in 1871 is worth about $20 today.
Paper gold (ETF’s) erode their value every year through management fees. The gold in my safe costs me $0 in fees.
The spread for Krugerrands is less than 3%. Bullion coin dealers are not making a killing. The margins are razor thin.
Gold will buy bread much better than cash.
The trouble with this chart is that it’s “Inflation adjusted”. The fiat dollar will inflate, but gold does not.
Gold is a hedge. Hedges minimize losses but they also can limit gains.
They should’ve drawn this chart in 1871 dollars, to be more truthful. The dollar’s lost 95% of its value since it was uncoupled from the gold standard in 1933 then 1969 via Nixon.
And/or they should have charted gold against the Dow or S&P or bonds or whatever else they want us to invest in instead.
If you buy Gold, you are buying near the top, and it has so far to fall. If anyone, especially a government that has to meet its debts gets nervous or takes its savings near the top and decides to sell, the descent can be disastrous.
Everything comes back to the importance of credit to our economy.
But whoever has money, has to invest it somewhere.
This sheds a little bit of light, but it fails to take into account globalization, which only happened in the last 25 yrs, and the competitive devaluation of leading currencies being done in order to strengthen exports. If the US, the European Union, UK and Japan all engage in quantitative easing (QE) in order to boost their economies, driving all their currencies down, then one currency needs to rise. That is the default currency of gold. In the last deflation / depression of the 1930’s, gold had a one-time jump from $20 to $35 per oz, a 75% increase.
What does the author think of this argument?
Vanguard doesn’t sell gold does it. Is your data point for 2010 adjusted for inflation? Doesn’t look like it. Past performance is no indication of future gains or losses. You had better spend your FRNs on something real before they’re only worth the paper they’re printed on.
read the paper.then you will buy gold!!!!!!!!!!
“truly disastrous events”, yes I think we are in historic times. This year’s deficit is going to be over a trillion and a half dollars. They forecast trillion dollar deficits for the next ten years. There will be a point that our bond holders will realize that we will never be able to pay them back. Then the Fed will be only ones buying the debt with inflation, possibly hyperinflation as a result. Also interest rates will inevitably rise from their historic lows and when that happens the interest we are paying on the national debt will consume most of the federal budget. The value of the dollar has been dropping to the point that countries around the world including the U.N. and IMF are seriously talking about changing the dollar’s reserve currency status. That could have a serious impact on us economically. The price of gold and silver reflect these real concerns. You cannot trust Bernanke to warn us of “disastrous events”, remember he basically said everything was fine right before the financial crash in 2008.
Looking to the past is not very helpful. The principal reason for buying gold is that this country is in the process of debasing our currency and, so far, our somnolent representatives in Washington continue to kick the can further down the road. We are, alas, in a new paradigm — new for us but not for the Weimar Republic. And we all know what that debasement led to.
My “worry” (and reason for holding some gold and gold-mining stocks) is that we Americans owe more than $50,000. per capita in public debt. This figure, though right now quite high, could continue to rise if/when 1) Social Security and Medicare costs increase and/or 2) loosening of the present tight control of interest rates (for any reason) causes the annual carrying cost of the national debt to accelerate. Silver and gold (and certain stocks) were effective in maintaining the wealth of forward looking Mexicans during their hyperinflation circa 1980. For these reasons, the insurance provided by possesion of hard assets is important to me.
I am also concerned that “Quantitative Easing,” as the US Treasury and our Federal Reserve call printing money, might some day in the foreseeable future cause the US dollar to suddenly weaken and devalue my American paper currency. To quote a writer from another blog: “If you don’t trust GOLD,the only asset with a 6000 year track record, do you trust the logic of taking a $1,000 pine tree, cutting it up, turning it to pulp, putting some ink on it, and then calling it one billion $ dollars?”
I am a financial advisor. I have been doing that for 23 years. I hate to say it, but if someone would have purchased bullion ten years ago, his return on investment would be higher than most of the investment products I am supposed to promote. Natural Resource and Precious metals funds would have done still better.
Considering all of the “qualitiative easing” (running the printing press) I do not see things “returning to normal” any time soon.
I’m not so sure going back to 1871 is valid. After all, during most of that time, we Americans held gold coins, or could turn our paper in for gold any time we wanted, right? Or at least there was some gold or silver backing the currency. I guess Nixon swapped metal for faith. I mean, the reason people might want gold is if the paper isn’t worth anything, right? So is it valid to go back to a point in the distant past to pull your average? But even if the time span is not so extreme, the average is still pretty low (since 1967 is around $640, based on your graph), compared to the 1871 to present average of $480. Probably the bigger concern for gold buyers is the “black swan” event that would make the context of these historical averages irrelevant.
In defense of gold, the recent price increases are partially due to the recent and unprecedented debasement of paper currencies world wide, not necessarily “disastorous” events. And far as selling physical bullion, usually the dealer who sold it will buy it back without questioning it’s purity.
The value of gold was subject to U.S. government price controls for many decades. Only the value in the years after price controls were removed is really relevant today.
The long-term production cost of the most efficient gold mines will usuallu detrmine the long term price on gold. Currently that is in the range of $700 to $800. Any significatnt price over this is usually due to hype or whatever!
Doesn’t oil prices change the equation? Even in a US economy that is growing GDP won’t higher and higher oil demand due to China and other parts of the growing world increase oil prices which is priced in dollars? Over the next 5 to 10 years won’t gold be a good place to store some of your dollars?
I think we’re confusing depression with hyperinflation here. Let’s suppose instead that the coming devaluation will be more akin to the circumstances which prevailed during the early Weimar Republic in Germany following WWI. This is NOT the scenario characterized by our Great Depression. You won’t be able to carry enough dollars in all your pockets, wallets, pocketbooks and shoes to pay for a loaf of bread. Having “hard assets” in such circumstances would assuredly mean something. I’m not actually sure however exactly how our already unprecedented (and furiously growing) national debt compares to Germany’s war debt (and I believe their hyperinflation was attributed to other factors including speculation as well), but I do believe the level of inflation to come here in the U.S. can at best only be guessed at… Current plans to raise taxes in this economy are certain to prolong, if not worsen the current recession rather than raise any additional revenue with which to bring down debt levels.
Gold will see $2000 before it sees $900
Gold as part of a portfolio indicates that it is considered a comodity and money is to be made by guessing supply and demend situations. That may be a tough analysis for most of us. But, gold as a safe haven may have some validity if you maintain enough to bribe the border guards in times of civil unrest. When things get really bad again, hopefully not in my country, none of the paper money will suffice. It happens a couple times a century somewhere in the world.
Gold may be close to an all-time high but so is our national deficit. And with our ongoing wars growing out of control, new threats in Korea and Iran to consider as well. No wonder the international community is openly pushing to move away from a dollar based world economy. For example, oil is currently traded in dollars. With our economy on the brink, unemployment continuing to climb (and therefore drastically lower tax revenues), social security is now operating in the red, the Post Office is operating with a 3.5 Billion dollar deficit, the number of houses in foreclosure is continuing to rise and the dollar value continues to slide.
Have you ever thought that maybe the sky is actually falling? The wise investor doesn’t keep all their eggs in one basket (ie, stock and bonds). If the dollar crashes you will wish you had gold.
Is inflation or deflation coming? Nobody knows. If deflation be in cash and treasuries; if inflation be in gold, silver and commodities. All I can see is a government that spends much more than it takes in and prints money at will, without any regard for the soundness of the currency. While it may feel like deflation right now, my bet is for significant inflation in coming years. The real estate bubble did too much damage. The authorities will need to inflate their way out of this one.
sheesh, open your eyes guys. The entire world has changed drastically in the past 140 years, or 40, or 10 or 2. “We’re not in Kansas anymore!”
Gold is quite easy to buy and sell, whether hard or equities. It has a great future for one simple reason. The Euro is doomed. The US dollar has been, and so far continues to be, the safe currency; but it is purely fiat with no backing in gold anymore. If you wish to place your total trust in the stability and long term value of the US dollar, then have at it. If not, then you best hedge with gold and other hard assets because there aint any other world currency out there to lean on.
If a full-blown collapse should occur, then gold & precious metals would probably be the best, anything short of that, cash is supreme!
There is nothing like the feel of holding a US Gold Double Eagle in your hand!
I think that you all are analyzing this history record with blinders on. I don’t care what happened more than 40 years ago. If you do you are not the type of person who should even be considering buying gold.
In the past 30 - 40 years, there has been no comparison when compared to the stock market. Gold has out performed the market year after year after year, many of which were extremely better.
If you bought gold in 1970 ( used to calculate a 40 year period) your returns to date would have been great. But we should not be concerned with the past history because the world has changed so dramatically that future outcomes can not be compared.
Obama has done so much to hurt our country and the world in so many ways that businesses in this country are afraid to do anything because they are uncertain as to the next crazy detrimental law that his administration is going to approve that will continue to hurt business.
These facts clearly indicate that the worse is yet to come. The mere fact of his billions of wasted dollars he has spent and continues to spend along with the constant continuation of printing money without value backing will surely lead us into a deep depression with hyper- inflation. It is coming and I am investing in gold and silver . Gold might not buy bread but it is a great insurance policy and will save me. Silver however will buy bread. Time will tell
The price of gold was held constant by the Federal government for many years starting during the 1930s up until 1972. That scenario could repeat. I like holding gold in the form of ETFs as a fixed percentage for my portfolio and rebalancing when it gets too high or too low -just as I do with my Stocks and Bond ETFs. It may be too late to make a profit in gold and there could be a peak and a loss. I look at my portfolio as having a basket of assets that I “shouldn’t” buy at current levels. Any and all assets can be terribly disappointing in any given time period. But usually when one or more asset classes are going down others are going up. By having very diverse basket of asset classes I try to mitigate against a portfolio catastrophe. Gold functions as a kind of long term portfolio insurance when mixed with stocks and bonds. Of course, the same can be said about any and all assets in relation to the others. In effect, it’s how they work together that makes a portfolio less volatile, less subject to big drawdowns and grow more evenly.
Compare and contrast the last ten years of gold vs. the last ten years of the S&P 500.
“The race is not always to the swift, nor the battle to the strong, but that’s the way to bet.” - Damon Runyan
Note that gold started to increase when the US after the went off the gold standard in the early 70’s. Look at the returns since. Why is this happening? Because what this guy has failed to mention is the debasing of the paper currency…its been significant and it will get worse. This is analysis was extremely shallow. Gold is money. It will go relative to the real value of the US dollar. When the government is printing money, its worth less. You see, its not that gold is going up, the value of the US currency is going down.
I trust the advice of Vanguard and thank them for it. However, our country is in quite a position with our continuing growth in trade deficits with other countries. We have over spent, under produced, and continue to promote programs that do not balance our budget. We are relying on others to support our appetite for goods. Interest rates are artificially low, our country borrows what it can and when that does not work, it prints more money. I see no way out of growing inflation. I think precious metal investing is a good diversification and 10% would not be a horrible place to be. True, gold and silver cannot be eaten. I would not eat a dollar bill either. But most Americans are over weight already.
It seems to me that when we get into these types of discussions we should help people see the big picture. What about owning land? What about other types of long term investments? The gold rush is very attractive, and folks like me who know so little may be confused or nervous. I keep hearing bad news and I keep wondering if stocks will fall off the cliff. So what are we to do?
I know of a worse chart than the one posted. Try posting the inflation adjusted chart of the S&P 500 for the same period of time. Lost at the past decade, not tell me that gold investments are the wrong choice at this time.
This writer is not presenting the whole story is he?
Using a 140 year history of inflation adjusted US dollars vs gold without further consideration/analysis of what is provided here is short of the mark. Firstly, using the CPI as a yardstick for inflation is off the mark, because the CPI is a politically contrived method of making inflation seem lower than it actually is (so politicians can conceal their inflationary policies). Secondly, for the first 100 years on the chart provided, the dollar was backed by gold which restrained governmental irresponsibility and kept the value of the dollar relatively stable. Compare that period of time to the time starting when the dollar was removed from the gold standard (i.e. where the treasury’s printing presses could run free and deficit spending became the norm). Can you see where that period started? That’s right, it started in 1971 when Nixon was facing the ‘72 election. LBJ’s Vietnam war and Great Society had busted the budget and “free” money was needed to pay for it all. Nixon needed to balance the budget without raising taxes (not good for re-election). The constraint of gold had to be eliminated so that Nixon could be re-elected…and so it was! What you see after ‘71 is the aftermath, and new historical precedents are being set all the time in terms of the dollar’s instability and in its waning value. The dollar’s in uncharted waters, looking back a 100 years prior to ‘71 for insight into what’s going on today is a non-sequitur. Real gold is the only defense against…
I am glad to see that that various commenters have caught up with many of the flaws in this posting. If you’d like to see something really eye-opening, overlay a DJIA in 2010 US dollars on its chart. Egad.
What about Silver?
The writer says “…gold prices have increased sharply, only to recede back to lower levels as things return to normal.”
Considering international debt levels, Americans’ endorsement, hopefully temporary, of wealth confiscation and redistribution, the goal of buying perpetual incumbency by removing a majority of citizens from responsibility for paying any taxes, the punishment of initiative and wealth creation and innovation, the cost of future entitlements, the current daily attempt to skirt the Constitution, “quantitative easing,” the ongoing deception of the politically manipulated CPI, our dependence on Chinese loans, the question of whether the reaction of the Greek people when a reduction in their entitlements was threatened will soon be coming to my neighborhood, the race and class conflict being stoked by our politicians, the characterization by our president of GM bondholders as “greedy obstructionsts”,the statement by Rep. Pete Stark that the government can essentially do anything it wants to do without restraint from the constitution, the future cost of decent health care, and the threat of nuclear terrorism, I wonder how long it might be before “things return to normal.”
In the interim, people will have to weigh the security they feel from owning some gold against the investment returns they might receive from other assets.
Does anyone know of a fiat currency that has survived longer than 50 years? The only possible exception that I know of would be the island state of Guernsey, however for several reasons (eg. size and dependence on larger countries) it may not be a good example.
The jury is still out regarding whether the Euro is doomed or not…right now is climbing again day by day against the dollar! As far as US dollar is concerned we are seeing the beginning of the end of the dollar as the official world business currency.
When the end will be in sight (unfortunately not too far in the future) then all bets are off and then for gold the sky will be the limit…..
Let’s be realistic, this is NOT 1890s, 1930s, or even 1960s.
As a commodity gold is no different than copper, pork bellies, aluminum or orange juice. Buy when demand is low and sell when demand it high. As a store of value… when the unthinkable comes, who will be buying your mining shares (with presumably worthless dollars) or your gold bars in a vault somewhere (presumably). How many bags of gold coins do you hold and have you proof enough they’re genuine to satisfy the guy with the gun and the bread? Disclaimer… I hold no gold and have not owned a gold stock since I sold my Echo Bay Mines preferred many years ago.
All right, so what big disaster caused the run up in gold in the early 80s? I content there doesn’t have to be a disaster to cause a run up in gold prices. It could be, for example, somebody trying to corner the market or a government try to diversify it assets.