Gold investing is not for the faint of heart. It’s a physical currency that sits in your house and collects dust. Often people choose to store it in safety deposit boxes meaning a yearly rental fee eats away at your asset when it’s sitting in storage and the stock market is moving upwards. It doesn’t generate a return and it doesn’t generate a dividend. By all investing standards it absolutely sucks. And there’s no reason an investor should look at gold as a normal investment vehicle.
However, that’s not why we hold gold. Gold is a currency and it’s the best one out there. I’ll spare the chemistry of it, but by the miracle of science, gold has been blessed with the best characteristics for use as a currency. It’s impossible to replicate, doesn’t tarnish, and doesn’t erode. Not to mention it’s shiny and beautiful and rich people buy lots of it.
Gold is a currency, but that doesn’t mean we can’t make a profit off of it at certain times. The reason that most people hate gold during certain eras is very often the best reason to own it at that time. See, gold gets battered when people have faith in the official US paper dollar currency system and the overall economy in general. Money flows out of gold when stock markets are booming from a debt and credit-fueled economic bubble that creates inflation, then as soon as the market crashes investors pile into gold at a disproportionately higher rate than any other asset. This is the definition of undervaluation, which is the best way to extract value from the rise of an asset. An asset is undervalued when people don’t price it at it’s true value.
Gold typically only occupies .25-.50 of a percent of the overall investment matrix in the United States. In the scenario of a recession, if a mere 20% of investors allocate a new 5% of their assets towards gold holdings, that will increase the overall share of gold in the investment matrix to 1.25-1.5%. That massive inflow of demand for gold would absolutely skyrocket the price of the precious metal.
Ideally we would return to the gold standard unless we can reverse losses in the value of the US dollar. The media pundits tell you it’s a relic of the past but that’s absolutely unfounded. So many misconceptions surround gold standard and it’s stability as a store of value helped ensure the advancement of the United States economy to unprecedented heights unseen by any other economy in history. If we were to return to gold standard, it would obviously need to be set at the proper price given the amount of gold available and the increase in currency over time. That price would be anywhere between 10,000 to 50,000 per ounce of gold depending upon which monetary supply level you choose. 100% gold-backing would set a price of 50,000 dollars per ounce. Unfortunately (and fortunately for gold investors), it doesn’t look like we’re anywhere near reversing the dollar’s decline. As dollar liabilities increase each year with our growing national debt, accelerated by the Fed’s Q.E. binge, inflation has run rampant. As the Fed attempts to increase interest rates, interest payments will only increase on national debt, not to mention the challenge of unwinding the Fed’s 4.5 billion in bond holdings. The future is bright for gold and it’s only a matter of time before it’s value is appreciated once again by savers and working Americans in general.