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.
You can’t escape the falling dollar by buying other currencies like the euro or the yen. They’re just paper, too. Lately they’ve looked strong versus the dollar. But in the end, they’re just paper.
And you can’t escape with stocks. Fine, stocks are up something like 60% since the March bottom. But that’s only if you price stocks in dollars. Try pricing stocks in gold — in other words, how many ounces of gold will one unit of the S&P 500 or the Dow Jones Industrial Average buy? If you think about it that way, with gold now at all-time highs, then stocks are really only up about 34%.
OK, 34% is great. But think of the risk you took to get it. And remember that in terms of real purchasing power — the ability to buy an ounce of gold, to acquire real value — stocks only went up about half as much as it seems on the surface. The other half is just the value of the dollar collapsing.
It’s going to get worse. The Fed is going to keep rates at zero just about forever. The government isn’t going to stop spending. As I wrote here a couple of weeks ago, Treasury Secretary Tim Geithner is going to try to make the dollar even cheaper by getting exporting nations like China to raise the value of their currencies.
So it’s like I’ve been saying here for a couple years now. Buy gold. It’s that simple.
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