Why Invest in Gold

Gold hit a high in January 1980 of $873/oz. It hit a low of about $256/oz in April 2001. In May 2010, gold broke above $1,230/oz. As gold made new highs over the past nine years, anti-gold pundits continued to call the top and to this day keep talking about a gold bubble.

But for gold to repeat the high of 1980 in inflation-adjusted dollars, depending on who does the calculating, gold would have to be valued at between $1,200 and $2,287 (using a government inflation calculator). It has already hit and surpassed that first target. The second target is some distance away.

The simple fact is that anyone who bought gold between the lows of 2001 and any time before gold reached $1,000/oz, is ahead of the game. The question for today is, since gold has surpassed $1,200/oz, has it finally peaked and is it a highly risky investment?

What Supports Gold?

The anti-gold pundits, who would be rich if they bought gold in 2001, continue to damn gold. They say it has no inherent value. It pays no dividends and earns no interest. Some also claim that gold never really gains any value. It simply goes up in value in relation to the dollar as the dollar goes down in value.

Some of that is partly true. It is a bit irrelevant that Gold pays no interest or dividends if the price of gold outpaces the gains of the stock market. The criticism that gold simply goes up because the dollar is going down has some truth. But it is also why gold is a good hedge against inflation and a store of value. The value of your gold will never decrease over time in real dollars.

It is said that a suit of clothes cost about one ounce of gold when gold was fixed at $35/oz. Since that time, an ounce of gold could always purchase a similar suit. Gold never loses its purchasing power whereas other investments and certainly the dollar itself does lose purchasing power.

Gold is considered a hedge against inflation and against general financial malaise. We certainly are experiencing a lot of financial malaise right now. Like any other commodity, gold is subject to supply and demand. Gold has fewer industrial applications than other precious metals (silver, platinum, palladium, etc.) but is considered by many to be real money and has been for 5,000 years.

In terms of supply and demand, some believe that we have already hit peak gold. Just as with oil, there is less gold being found and it is more difficult to extract. Many mines would not be feasible or profitable if it were not for the high price of gold. The price of extracting gold is going up due to increases in material, labor, and energy prices.

While a number of Central Banks have sold off some of their gold, others are buying it up, like India and China. Demand is increasing to the point where companies are holding gold parties to buy old jewelry and other gold.

Some believe that the U.S. is in danger of hyperinflation. Hyperinflation as experienced by Germany during the Weimar Republic and Zimbabwe recently, occurs when the money supply explodes and the country’s currency drops precipitously in value.

In this situation, prices rise rapidly. In Zimbabwe people were paid during the day and they immediately went out and spent their money before the value went down by the end of the day. The country had to issue higher and higher denominations of bills to keep up with inflation.

Gold protects against such an eventuality.

Has Gold Reached Its High?

The anti-gold folks will say “Yes,” and have been saying yes throughout the entire gold bull market. The gold “bugs” will say, “No” and have said no throughout the bull market. Of course the gold bugs have been right so far.

But if gold has reached the 1980 high, in inflation adjusted dollars, at $1,200, or even if the target is $2,287, isn’t gold a much riskier investment now than it was over the past nine years?

First, it must be understood that no one knows for certain what is going to happen with the price of gold or other precious metals. So any investment in gold must be considered a risky investment. Since gold has hit new highs this month (May, 2010), it becomes less likely that it will continue to go up. No investment goes up indefinitely. In fact, gold had a pretty solid correction in the week ending May 21st.

Some gold investors are predicting highs of $1,300-$1,500 before year’s end, while others are shooting for $5,000/oz to $10,000/oz and even more. Any of those numbers is theoretically possible but if we should reach any number in excess of $5,000/oz, it would mean that the country was probably in financial ruin.

Having said that, I would personally invest in more gold if the price should drop significantly below $1,000/oz. Fortunately, for any who would like to have the comfort of gold ownership as a small or significant part of their investment strategy, there are many ways to make that investment.

It is not within the pervue of this article to go into any of these in any detail. Suffice it to say that one can buy gold coins and/or bullion. One can buy gold mining stocks, from juniors to large miners. One can buy exchange traded funds or mutual funds that buy selected gold miners or follow gold mining indexes, bringing instant diversification.

Think about your own investment strategy and needs. Investigate the various ways of investing in gold. See if it fits you own long-term goals.