There has been a merciless war out there between investors who are in favor with gold (gold bugs) and those who oppose them and believe that gold has no value, utility, create no value, and as such should be avoided.
They say that the recent substantial decline in gold price is an evidence of their argument and they predict gold going even lower to $800 an ounce levels.
To me it looks like those who are opposing holding gold in a portfolio either on purpose, intentionally or unintentionally try to defy the law of physics in financial world.
If you haven’t lived on a rock recently and watched what FED has been doing to the dollar and economy in the last 5 years, you would agree with me that you should be buying gold when it is this low before it surges up.
Owning gold is not an investment and it will never be. On that I agree with gold critics. Investors shouldn’t be buying gold as an investment, but as a hedge against the dollar, faltering economy and increasing inflation. As Peter Schiff says, you should be buying an asset which cannot be destroyed by any government.
Gold and silver are those assets.
All the gold panic decline started by Goldman Sachs who issued a recommendation on shorting gold in December 2012 and reiterated that recommendation April 2013. The gold then declined from 1700 an ounce level down to today’s 1200 level.
(MORE: Gold Bug Schiff Counters Goldman Sachs on First Drop Since 2000)
In my opinion, all the fall in gold is artificial and it will potentially turn against those who are shorting it in a long run. I even think it is pushed down by big players for them to buy it cheaper in expectation of near future troubles the US economy is facing. Push the gold down today, buy it from scared retail investors and wait.
It is not small investors who are selling however, but big banks shorting it!
Does gold have value or not?
One subject of the gold war is whether gold has value or not. Warren Buffett says:
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
I agree with Warren Buffett on many things, but this one. Gold deniers, seems to me, are evaluating gold as a standalone asset. They look at its absolute value only and then deny it as fiction.
I believe, it is a wrong point of view. Gold’s value is always relative. Its value is always relative to something – relative to dollar, Japanese yen, British pound, Euro, or relative to economy.
It is same as a gallon of milk in the store before you drink it. Its value is also relative to other factors such as cost of production.
(MORE: Buffett Is Right On Gold Investing)
That said, yes the gold absolute value may be same all over its whole thousand year history. But its relative value fluctuates as the value of the dollar, Euro, US, or world economy fluctuates.
At one point you get more currency for gold at other time you get less. As inflation pops out (and it will, believe me) the value of currency will go down.
Relative to it the gold’s relative value will go higher.
Why I believe gold will rise again
As Peter Shiff says, the dollar and gold work together. When the dollar rises, gold declines and vice versa. We see the strength in dollar. But in my opinion this strength is not supported by the US or (western) world economy.
A strong dollar is not an interest of FED as well as of some significant players. I am pointing at George Soros now, who is constantly bearish on dollar.
FED’s printing speed and quantity is at a huge scale ever seen in the entire US history. It will pop up one day as a rapidly growing inflation. I do not know the reason why inflation wasn’t rising yet and why it recently was actually declining (which puzzles economic experts too). but this situation will not last forever. The economic pendulum will always try to find the equilibrium no matter how much FED is going to fight it.
(MORE: Why Isn’t There More Inflation?)
I think the reasons would be that the money FED is pumping into the economy are not used (banks hold them in reserves and in better yielding instruments), the US dollar is used as a world reserve currency and many countries keep dollars in reserves as well expecting worse crisis coming (lack of spending dollar reserves except where forced by the economic situation such as Greece), and last, but not least, the consumers are not spending money.
Americans are actually paying off the debt and saving. That’s something FED wasn’t expecting. They wanted us to borrow more money and spend them. It is not happening.
Yet one day, all these will occur and the inflation will boost up.
Recently, economic experts start believing that inflation would help to move the stagnant economy. Even FED policy makers feel they should ignite higher inflation in order to help economic growth and lower unemployment. We may soon see the right opposite of today’s environment and the FED may unleash another beast which will take a toll on many investors’ portfolios.
(MORE: In Fed and Out, Many Now Think Inflation Helps)
Gold may help you to prevent devaluation of dollar in the future and protect your portfolio against declining dollar. And I am not speaking about a few days, months or years, but the entire length of your retirement savings phase. Even if there will be no staggering inflation, even 4% annual inflation for 30 years will destroy the value of the dollar. Therefore investors should hold between 5% and 15% of their assets in gold.
I do not think you need to be buying physical gold unless you expect even gloomy and apocalyptic outcome. I think buying GLD ETF is sufficient value protection.
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A few years ago when banks paid 3, 4, 5 or even more per cent interest on deposits such as CDs (Certificate of Deposit) or some savings accounts people were creating ladders. It was a quite popular method of creating an income stream.
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