Why invest in gold?

Too many investors miss the point of gold, but the yellow metal has something that dollars, yen, euros and yuan do not: it’s price can’t be easily manipulated. Therein lies its beauty.

Too many investors miss the point of gold. They look at it like a lump of metal well-suited for gathering dust in a vault. Gold, though, has something that dollars, yen, euros and yuan do not: it’s price can’t be easily manipulated. And that’s the key behind the metal’s meteoric price rise over the past decade.

As governments around the world quietly inflate their currencies, they are – in effect – reaching into our bank accounts and skimming some coin off the top. They do it quietly and most of us are none the wiser.

Right now, for instance, the official inflation rate in the U.S. stands at 3.56 percent. That means that if you stuff $10,000 into your mattress on Jan. 1, it’ll be worth $356 less than it would have if you spent it right away.

The numbers on the front of your bills stayed the same, but the actual purchasing power of those dollars went down. The supply of gold, on the other hand, can’t be arbitrarily increased based on political decisions out of Washington. If demand goes up, the price of gold is going to go up with it.

And, if the dollar’s going down at the same time the demand for gold is going up, the relative change in the value of gold will be compounded.

Still not sold? What if we hit double-digit inflation? You might have your cash sitting in a bank account that’s earning 1 percent interest every year. If inflation hits 10 percent, that means every dollar you have actually loses 9 percent of it’s purchasing power every year!

What’s scarier is the fact that many believe we’re already suffering through double-digit inflation. John Williams at ShadowStats.com calculates what’s known as the SGS-Alternate CPI number. It’s not something he made up. It’s actually the exact method Bureau of Labor Statistics used to report inflation through 1980. Since 1980, though, the government’s continuously fiddled with its calculations to make inflation look tamer than it would otherwise be.

Right now, ShadowStats reports that the inflation rate stands at 11 percent. That’s a scary number – unless, of course, you’re getting an 11 percent raise at work every year and your 401K is pumping out double-digit returns. Since most of us aren’t that lucky, precious metals like gold start looking attractive.

And, if metals look attractive to you and me, then they definitely look attractive to the Top 10 percent of the wealthiest Americans. Keep in mind, too, that that Top 10 percent owns fully 80 percent of all the outstanding stock in public companies. They know how and where to place their bets, and a lot of them are flocking to gold.

More arguments against gold

I’d rather invest in something tangible, naysayers argue. Something like oil or real estate.

Those aren’t bad ideas, but gold has distinct advantages over each of those alternatives. The most important advantage is the fact that supply of gold is largely static. Oil and real estate are intimately tied to market conditions.

If the cost of oil goes too high, consumers drive less and spend less. On top of that, businesses incur greater expenses and the price of goods rises. That slows down economic expansion and eventually drives down the price of oil. The same goes for real estate.

If the official inflation rate hits double-digits, there won’t be a bank in its right mind that would be willing to loan a consumer the funds to buy a house at today’s interest rates. And not many consumers would be interested in buying a house with a fixed mortgage around 10 percent.

The value of gold can’t be inflated away, and therein lies its power. In a world where economies around the world are racing to devalue their money, there are few places investors can turn. That’s why I’m confident we haven’t see the end of the bull market in gold.

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