The Best is Yet to Come

Have you seen the t.v. commercial that expounds on the merits of gold as an investment?

Near the end of the message, the announcer is talking about how much gold prices have increased in the past ten years or so. And then he says,

"And the best is yet to come."

Really?

Do you really want the price of gold to increase? If so, do you really understand that the price of gold is a measure of fear, inflation and political instability?

I first bought some gold back in 1979 when the price was closing in on $700 an ounce. By early 1983, the price was down to near $300 an ounce and it stayed there for nearly twenty years.

Why? The monetary policy of Paul Volcker drove interest rates way up and set off a serious recession. But it took the steam out of the double digit inflation we were experiencing. And it took away a large part of the reason that gold prices were so high. In spite of moderate inflation from 1980 through 2003, gold prices didn't increase -- which demonstrates that gold is not a pure inflation hedge. The price of gold does not correlate closely with inflation because it is also a measure of the degree of political instability. And, of course, the price is affected by large purchases and sales by governments.

Speaking for myself, I'd be happy if the price of gold were to drop from it's current level because that would be an indication that things were back to normal. Over time I do believe that gold will increase to reflect the loss of value in the dollar due to creeping inflation.

As far as the price of gold is concerned, I surely hope the best is not yet to come and that gold won't go up to $5,000 an ounce as some promoters are claiming.

Nonetheless, I will continue to maintain a portion of our net worth in what Lord Keynes called "the barbaric relic" -- just in case things get worse instead of better.

Vern