by Michael Myers on November 10, 2009
Donald Luskin, chief investment officer of Trend Macrolytics, describes why gold is gaining favor with people concerned about the future of the dollar. Two caveats: governments sometimes seize gold when it becomes a very compelling safe haven; and, gold hit an all-time high at $1,100 in monetary terms, but $1,000 in 1980 (the previous high for gold) translates into about $3,000 into today’s dollars (adjusted for inflation).
On that note, anyone concerned about retirement income should think about the future in terms of purchasing power. If inflation jumps up to 10% (it reached 19% in 1981), money in savings accounts will be devastated. Inflation transfers wealth from retirees to workers.
Link: $300,000 of Gold, in the Palm of My Hand
The longer the Fed keeps interest rates at zero, the more worthless paper money becomes. That creates the impression that gold is more valuable — in fact, this week it hit all-time highs at almost $1,100 per ounce as the Fed announced the indefinite continuation of its zero-rate policy. But that’s not gold becoming more valuable. That’s the paper money in which the price of gold is denominated becoming less valuable.
In other words, gold is the constant. Its value doesn’t change. Its dollar price changes, but not its value. So when investors come to me and ask me how they can hedge against the falling value of the dollar, I always tell them to buy gold. [click to continue…]
by Michael Myers on November 4, 2009
Below are some reasons that people I know are holding gold’s little brother, silver.
Link: Invest in Silver Over Gold – Seeking Alpha
As we get closer to the day inflation kicks into full force, it is worth noting some common gold:silver ratios. History has more or less showed us that the historical ratio has averaged between 20:1 – 25:1 (depending on the measured time horizon). I personally like to break it down using different ratios for periods of low to moderate inflation and high and double digit rates of inflation. As a rule of thumb for times of low to moderate rates of inflation (below 5 or 6%), I use a ratio between 45:1- 55:1. During times of high to double digit inflation (late 70′s style) I revert back to the historical ratios between 15:1-30:1. Given the current low level of “headline inflation” (which is nonsense anyway), which has to inevitably rise over the coming decade, silver is very attractive on the gold:silver ratio, currently at 64.36. Though inflation is said to be “very low” (according to the governments convoluted measure), my expectation for it rise sharply over the coming years, makes silver an absolute bargain.
Take a conservative estimate of the future gold price when inflation is in full force, say $1300/oz, silver using a ratio between 25:1 to 40:1, would give you a price somewhere between $32.5 and $52.5. It need not even be take that far to see the price appreciation potential. Assume the price of gold remains at $1060/oz throughout the time when inflation plagues consumer prices, silver should still be between $26.5-$42, which is a substantial rise on a percentage basis. [click to continue…]