Of All the Glittering Investments in the
World, Few Are As Good As Gold
Today's comment is by Bob Bauman, Senior Writer and Legal Counsel for The Sovereign Society.
Dear A-Letter Reader,
Gold is once again riding high. Indeed, if the United States dollar still had gold backing today, the dollar might look like a strong currency - instead of the debt-laden instrument it now is.
Of course, if gold and the dollar were still tied together, the price of gold wouldn't be soaring either - because gold prices tend to react inversely to the greenback.
A Little Golden History
Gold has had an interesting, turbulent past over the last 100 years.
Back in 1933, Franklin D. Roosevelt issued an executive order to make it illegal for Americans to own gold. The reason? He wanted to block Americans legal right to demand that banks give them gold for their dollars. In the early 1970s, President Richard M. Nixon cut the last links to the "gold standard" that had made U.S. currency redeemable for real gold.
The last gold bull market peaked on Jan. 21, 1980, when eager buyers paid more than US$900 apiece for coins containing a single ounce of gold. That gold bull market began in January 1975, after President Gerald R. Ford signed a bill legalizing private ownership of gold coins, bars and certificates.
After the 1980 top, the price of spot gold hit an historic US$850 per ounce, and then suddenly the herd turned bearish. The next day, sellers suddenly outnumbered buyers and gold tumbled to US$737.50 an ounce. It continued falling and then traded sideways from US$300 to US$400 for nearly two decades. When gold finally bottomed at about US$250 in the summer of 1999, smart investors made their first forays back on the buy side.
Gold is a Valuable Hedge in Troubled Times
After the "Wall Street Crash," from September 1929 to April 1932, the Dow Jones Industrial Averages Index slid from 382 down to 56, a drop in value of nearly 90%. Some 4,000 U.S. banks closed their doors and soon millions were unemployed. The Great Depression had arrived with a vengeance.
During that same bleak period, the price of gold skyrocketed upward 70%. The value of gold producing stocks, such as Homestake Mining, shot up almost 800%. Here's an impressive fact: after the market crashed, anyone holding 10% of their investment portfolio in gold and mining shares would have had all their other stock losses neutralized by their valuable gold holdings alone!
Gold also increased in value after "Black Monday", October 19, 1987, when the Morgan Stanley index of world shares fell 19% over 10 days. And during nearly all of the mini-crashes stock markets have experienced since then, gold has either held or increased its value.
Golden Days are Here Again
On November 7, 2007, the market price of a troy ounce of gold bullion briefly touched US$845.50, the top so far in gold's current eight-year bull market and a 28-year high in New York trading. The news made headlines and became a hot topic on radio talk shows. (It closed last week at US$800.20).
Gold is a fairly accurate mirror of the American economy. When the economy is in the doldrums - a stock market correction, depressed real estate, a drop in the dollar's value, a ballooning trade deficit, higher inflation - the value of gold has increased, even skyrocketed upward.
For example, with the U.S. stock markets at an all time high in 1998, gold was near a 21 year price low at US$278 per ounce. It sank even lower later that year to a price of about US$271, not far above production costs then averaging about US$250 to US$260 per ounce.
Today, trading and owning gold has never been easier, thanks to the Internet. "There's been a democratization of gold ownership and new ways to acquire it," said Jon Nadler, a senior analyst for Kitco Inc., a bullion dealer based in Montreal.
"While gold coins or bars remain popular, investors no longer have to worry about storing their gold when they can buy gold certificates or digital ounces," Mr. Nadler said. "And with exchange-traded funds, the metal can be traded much like shares of stock."
Gold investors tend to buy on bad financial news. Rich Checkan, vice president of Asset Strategies International Inc. (ASI), a leading precious metals and currency broker in Rockville, Md., said purchases at his company started picking up substantially after the sub-prime mortgage turmoil began in August.
Most of his buyers were acquiring Perth Mint Certificates, which entitles you to own gold held in a government-vault in Australia. (Michael Checkan, ASI's president, serves on The Sovereign Society's Council of Experts.)
Gold Buys the Same Amount of Bread as
in Old Testament Times, But the Dollar Doesn't Even Buy as Much as it Did Last Month!
Throughout our 10-year existence, The Sovereign Society has recommended that any balanced portfolio required some precious metals holdings, especially gold. There are historic reasons for this confidence in gold as a continuing investment.
Douglas M. Cohen, an analyst for Morgan Stanley summed it up: "Gold has thousands of years of history on its side. That history is full of episodes when people insisted gold was dead, and sure enough, gold has tended to rally back very strongly."
Gold ownership has always defended against both inflation and deflation. That's because of its constant purchasing power.
Compare gold today with the biblical times of the Old Testament during the reign of King Nebuchadnezzar. Then and now, an ounce of gold buys about 350 loaves of bread. The same quantity of gold will buy a loaf of bread today under Britain's New Labour Party as it would have under an earlier, less bland reign, that of King Henry VIII in the 16th century.
One gold mutual fund manager summed it up: "Gold is the only real money. Silver is only pocket change and everything else is really just a credit instrument taken on faith." That's sadly accurate when paper money, like the Indonesian rupiah, the Thai bot and the South Korean won, declined in value hourly as they did in the late 1990s Asian currency crisis.
And as now the U.S. dollar slips downward, gold remains solid. Every nation's paper currency buys far less than it did a century ago, but gold buys almost twice as much. That historic record demonstrates true insurance against economic swings.
Gold Survives and Even Thrives Amid Uncertainty
Think about it. Gold cannot be inflated by printing more. It cannot be devalued by government decree - the free market dictates the price. And, unlike paper currency or investments in stocks and bonds, gold is an asset which doesn't depend on anybody's promise to repay.
Although gold has been mined for more than 6,000 years, only about 120,000 metric tons have been produced. Lump that together and it's just enough for a cube measuring only 18 meters (about 55 feet) along each of its six sides. New gold mined each year totals less than 2,000 metric tons, about the size of the living room in a small modern house. Gold remains one of the scarcest, and most sought after metals on earth.
Time and again, gold has proven to be a successful hedge against devaluation of an investor's national currency. It's one of the few investments that survives, even thrives, during times of economic uncertainty.
For those who in recent years followed Sovereign Society's repeated advice to buy gold, the investment has paid off handsomely. With gold at record high prices and the world facing what could be a prolonged period of major economic turmoil, buying gold even now may be a good hedge against the future.
People who have known prolonged prosperity may not fully understand the historic implications of gold's important role when bad times arrive. But when crisis erupts, gold will once again be recognized generally as the one perennial investment that's still "good as gold."
BOB BAUMAN, Legal Counsel
EDITOR'S NOTE: Our insider experts are saying that 2008 may be the year when gold finally cracks the all-time high of US$850 an ounce. This February 20 - 23, we'll have precious metals and coin dealers on hand at The Sovereign Society's Emergency Money Summit in St. Kitts to give you the easiest and most effective ways to buy gold - before it shoots to US$1,000 an ounce. Click here to learn more about this unprecedented event.
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