It was a good week for gold, closing higher for the week after a wild drop from $1,600 to $1,550 before a steady late week recovery to $1,588.
I’m expecting next week to be a repeat of this one; with slightly higher prices by the end of the week with roller coaster price swings in between. This comes with the caveat that the rally Friday seems to be related to expectations the Federal Reserve will find a way to dump more stimulus cash into the economy. If the Fed once again disappoints in that regard, we could see a rather sharp correction.
Last week I pointed out one analyst expecting gold to reach $8,500 by 2015, now this week comes an equally dire analysis destroying almost every reason to buy gold. It’s fascinating to me how intelligent, educated people being paid to analyze commodities can reach such vastly different conclusions on the same topic.
My reasons for buying gold and silver are really not that complicated. In the world we live in money has been reduced to blips on a plastic card. That’s fine; it’s really just technology catching up with paper. My problem with computer blips as money is that there’s nothing behind them. There’s nothing behind paper currency, either, but at least you have the paper and it has a serial number on it. With computer blips all you have is the hope that one bank accepts blips from another.
So far that hasn’t been a problem because the same Federal Reserve creates the blips that creates paper currency. But they’re just numbers in a computer; there’s no accountability for computer blips. There’s nothing stopping the big banks, run by people who have shown a willingness to cheat the game in their own favor, from changing the numbers.
Computer blip money has no serial number, no encryption hash, nothing that would prevent someone from merely adding a couple zeros to the end. Okay, they might get caught by an audit at some point, but the change would not be immediately recognizable as a fraudulent transaction. If someone hands you a hand-drawn $20 bill, you know it’s a fake. If someone sends you phony computer blips who’s any the wiser?
That’s the real reason I keep part of my wealth in gold and silver; it’s really hard to cheat a metals assay. A fixed amount of gold has a specific size, weight and specific gravity. It can be tested, measured and documented with a high degree of accuracy. At some point in the future that fixed amount of metal can be exchanged for a pile of paper, or a plastic card loaded with computer blips, or whatever passes for currency at the time.
Whether I make money on that transaction or not is immaterial. Gold prices can stay depressed for long periods of time, as demonstrated by the stretch between 1980 and 2000. That’s not why you’re buying gold, but that is why you’re only putting 10 to 15 percent of your wealth in precious metals.
Had you put all your investment cash in gold in 1980, it would have been dead money for 26 years and you would have missed a chance to build a fortune in the stock market and real estate. Yet if you put all your money into the market and real estate in the 80s and 90s, you woke up in 2007 flat broke with a house you couldn’t sell and missed one of the great gold rallies in history.
That’s why I stress diversity and moderation in investments. Keep 10 percent of your wealth in bullion-priced precious metals, but don’t keep it all there.