| jul 26 2007 | | Gold III | Gold is again preparing for the next leg up in this multi-decade bull market. The smart money has exited the COTS shorts and the dollar is dipping its toe in the 80 level prior to taking the plunge into the deep without buoyancy aids.
Now I know I have been banging on about gold for a few years now and I hope you have been making easy money along with me, however it is important to understand that gold is not going up in price as much as currencies are going down. Granted if you applied the real inflation factor to the POG then it would be around $2000/ounce but then most other items would show a similar correlation. The fact is most world governments are currently expanding their M3 by over 10% per annum. This translates into inflation, which means diminished purchasing power, which leaves us all impoverished. That is unless you preserve your future purchasing power by not holding currencies or currency denominated accounts but something with a sustaining value.
For instance if you bought an item with cash in 1980 then just allowing for devaluation it would cost twice as much today to replace it, everything else being equal. That is what governments all around the world are doing to their nation’s currencies. Good stewardship? This wasn’t always so, right up to the ending of the Gold Standard, currencies and prices remained stable for decades. Apart from during a brief period when the Americans fixed the price of gold at US35/ounce, gold has been a store of wealth preserving future purchasing power.
The first rule of investing is capital preservation. Using the data from above, since 1980 you would have first had to make 50% on your investment, plus have made sufficient to allow for inflation and had to cover your trading costs, before you started making money. Now how do your returns look? By way of contrast if you held gold you would have maintained your purchasing power. If you look back through history you will see that this has always been true unless unscrupulous rulers or administrations ‘clipped’ the currency, diluted the metal or experimented with fiat currency. All these abuses resulted in the end of empire and misery for their people.
Gold doesn’t pay interest, pay a dividend or generate a return. What it does is nothing. It outlasts all other monetary experimentation. If it could it would smile as politicians try to substitute it, imitate it, marginalise it and ignore it. But as the years and decades go by you will be glad that you understood its secret.
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