Posted on 07/27/2011 1:31:27 PM PDT by SeekAndFind
There’s one question that I’ve been seeing over and over for the last several weeks as the price of gold has taken out its all-time highs and continued a nearly uninterrupted ascent: Should I buy gold now?
It’s understandable, especially for people who don’t own precious metals yet. Nobody wants to be the sucker who buys gold at the top, only to watch it crater back to $1200 or below. But here’s some food for thought–
The US dollar is shattering historic lows against currencies like the Swiss franc, Australian dollar, and Singapore dollar. Any currency that isn’t a complete disaster is now being viewed as a safe haven. And the mainstream world is now, finally, waking up to the reality that the United States might actually default.
Never mind that the government has been insolvent for years and the evidence of such has been widely available to anyone willing to look at basic facts. Literally, only in the last week have people finally began to consider the possibility of a US default.
Here in Europe, the situation is arguably even worse. No one is being shy about a default in Greece– it’s discussed openly now by policymakers, and major financial institutions are preparing for a restructuring. And with its public debt more than 120% of GDP, Italy will not be far behind.
Governments no longer have the benefit of operating behind a curtain; their financial imprudence and technical insolvencies are now under the spotlight for all to see… and confidence is fading quickly.
The more people lose confidence in the dollar and euro, the more they look for alternatives. Large institutions and money mangers collectively control trillions of dollars within the financial system. Unallocated capital– funds held as cash and not being actively invested at the moment– must be held somehow, somewhere.
This is the chief reason why so many smaller currencies are surging. Compared to the dollar and euro, the Swiss franc looks incredibly safe, and money managers have a much higher degree of confidence that their Swiss bonds will be repaid than they have in the US or eurozone.
The more capital flows into these smaller currencies, the more they’ll appreciate against the dollar and euro. It’s simple matter of supply and demand– increased demand for the Swiss franc coupled with excess supply of US dollars means a stronger franc in US dollar terms.
Ultimately, this is the primary reason for gold to go higher in the long term.
Large financial institutions are increasingly looking at gold as a safe haven; it’s becoming less of a speculation and more of a store of value… and unlike most of the other available asset classes, precious metals are not politically sensitive.
Even stronger currencies like the Swiss franc have limits to their appreciation. At some point, the Swiss National Bank will impose capital controls to thwart the rise of its currency. Oil and agricultural commodity prices will likely be regulated and speculation outlawed if prices become too high.
But if gold goes to $2,000… $3,000… it may be an embarrassment to central banks, but it won’t become a populist issue. You won’t see any Tunisian merchants setting themselves ablaze because the price of gold is too high… and not too many politicians looking to fix the price.
Even if they do try to regulate gold prices or even make it illegal, you can be sure that the gold trade will continue to thrive in the rest of the world– especially in Asia and the Middle East.
So instead of worrying about buying gold at its all time high, ask yourself another question instead: Over the next few years, do you expect that these broken, bankrupt governments will inspire confidence among institutional investors, or do you think that confidence will continue to erode?
If you’re leaning towards the latter, you can be sure that more money will flow into gold, and that prices will rise.
Yes, there will be price fluctuations. Whenever the US government announces that it has finally reached a debt deal, there will probably be a correction. Given what’s coming in the next several months and years– debt downgrades, more budget battles, government shutdowns, asset seizures, etc., any correction will be a small blip along a long-term rising trend line.
And in case you’re still worried that you’d be a sucker to buy gold at $1600, consider that, if you don’t, in three years you’ll probably feel like a sucker for not buying gold at $1600 when you still had the chance.
Hey a deflationista! Yeah, I believe that deflation is the name of the game, whichi is why they are going to seek to increase interest payments, not lower them.
Fee, Fie, Foe, Fum...I smell a train wreck for those what’s dumb!
Gold has been at an all time high for the last three years.
I could be wrong but I think your logic is 180 degrees wrong. If the economy "tanks" gold and silver (after a short period of falling) will skyrocket.
You can never go wrong buying Gold. except when it’s really up .. lots of speculators abound.. Diamonds may be a good buy too.. corn and soybeans too.. :-)
Thanks for the graph. The only game in Washington is to spend more than they take in and print money for the balance.
The current players have been doing the ‘print more money’ tango for decades and know no other dance steps.
The graph makes it pretty obvious gold will continue to increase in price since there appears to be no will in America to say enough is enough.
I wonder if, in January, 2009 (when gold was at $900 and silver was at $12.00)people were asking the same question?
I asked the same question when it was at an all time high of 950 and dropped what was left of my 401K. As long as the trend line is up for the past qtr you should expect it to continue.
Pray for America
RE: I wonder if, in January, 2009 (when gold was at $900 and silver was at $12.00)people were asking the same question?
I can attest to the fact that they were. In fact, the Gold ETF, GLD was dropping to $86 ( about 860/oz ) early in 2009 and I was wondering if Gold has already made its top.
I decided to put a small percentage of my portfolio into GLD simply because I saw that Obama and the Fed were hell bent on printing money. I bought at about $880/oz. I am of course, close to doubling my investment already. My only regret is not buying more.
When Nixon was threatening to break the last ties to gold, Milton Friedman predicted that gold would sink like a stone. He was certain its only value was as the backing for the U.S. dollar.
He was wrong. Respectfully, I think you are, too.
When our economy tanks, gold will be driven even higher. Or, more properly said, the dollar will be driven even lower. Gold remains the same.
“I wonder if, in January, 2009 (when gold was at $900 and silver was at $12.00)people were asking the same question?”
I wondered at that time. I sold most of my sinking stocks and bought physical gold at $900/oz. No regrets.
When Nixon was pondering whether or not to break the dollar's last ties to gold, Milton Friedman predicted that gold's price would drop to near zero. He was convinced that its only value was its connection with the almighty dollar.
He was wrong. When Nixon made the move, gold instantly shot up to $50 and tripled by 1972. I think you're wrong, too (respectfully). When the economy tanks, the dollar will along with it.
Gold is the constant -- it only reflects the perceived value of the currencies it's priced in. I'd keep buying.
I wish I’d had your insight (and considerably more fiat:)
In case I wasn’t clear, my question was rhetorical. I’m sure when gold hits $2,000.00 and silver $70.00 people will be asking the same question. Hmmm, precious metals or dollars, what should I buy? Duh.
I believe that deflation is the name of the game...
Gold has been at an all time high for the last three years.
goldbug ping
Thanking FReeper Beelzebubba for the awesome US Debt & Debt Limit vs Gold relationship chart.
One can not know whether gold is at an all time high. We only know that gold has recently reached an unprecedented high.
I use a local coin dealer. His margin is less than that of anyone who sells on line or on the phone.
The worldwide gold market is small. Much smaller than bonds or stocks. Thus money flowing into this market can make it shoot upwards during an inflation or deflation. Just depends on the events and the market psychology
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