GOLD - INVESTMENT OR INSURANCE?

Gold has been bought as an inflation hedge for years. As such it hasn’t worked well because of the U.S. Government’s ability to manipulate the price and make billions of dollars in the process.

 Until 1933 U.S. citizens were required to sell their gold to the gov’t at $20.00 per ounce, at which time, since the government now owned all the gold, President F. D. Roosevelt raised the price to $35.00 per ounce thereby allowing the gov’t to print more money since it was at that time a gold backed currency and they had just ripped the gold owning citizens off by 65%.

In 1971 President Nixon abandoned the Gold standard and allowed the price of gold to float with the world demand and opened it up to Americans to own gold again. Thereby allowing the government to print any amount of paper dollars they wanted because there was nothing needed to back the currency. Opening it up for U.S. citizens to again own gold, which the government sold back to them at free market price, was one of the factors that drove the price up. By 1980 it reached a price of $850.00 which in todays dollars would be over $2100.00

Since then the world governments have been effective at manipulating and controlling the price of Gold by buying and selling as they chose. Even though inflation rose by double digits in the 80’s the price dropped to $350.00. It did not work out well as a hedge against inflation.

Fast forward to today and you have the U.S. Government printing paper money as fast as the printing presses can print with nothing to back it up. With other world economies in trouble as well, it is keeping the greenback strong for the time being.

The price of Gold is now starting to creep up due to world demand. China has started to be a purchaser of gold, no longer confident in owning U.S. Dollars, it has allowed it’s citizens to now own gold, and has started a Gold ETF, thereby affording it’s citizens the ability to own small amounts of the metal.

With governments around the world In a financial bind the American dollar is remaining the strongest currency in the world and the go to safety currency. The question now is can it retain it’s strength in the face of the massive stimulus spending they are now proposing. If it does it will keep a ceiling on the price of gold.

As the world economies start to recover and confidence comes back to lesser currencies, people will start dumping their U.S. dollars. As the dollar weakens, the theory goes, there will be upward pressure on the gold price.

If the U.S. led recovery program does not go exactly as planned, all bets are off, governments worldwide will no longer be able to manipulate the price of gold and it will have the potential to spike to prices not even dreamed of in past.

So as an investment gold has not worked out well in the past.

As a speculation, if your timing is spot on, there has been an opportunity to make some money.

As insurance against a pending financial disaster, in my opinion, it is a very wise choice.

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