Thursday, November 26, 2009

An Inflated Economy?

Some people think that gold is a good long term investment. I think that it is. Many governments are running large deficits and increasing their monetary base. Gold should be the logical hedge against the inevitable resulting inflation. So far, government economists are not too worried about it. They point to the fact that there is little or no inflation, so far. They say that there is not likely to be increased inflation in the future do to continuing high unemployment and low wages and assert that governments are going to have the capacity to pull back the increased liquidity they have added when the time comes and largely repair any temporary imbalances in the monetary base before inflation becomes a problem. They insist that deflation is the real problem in a contracting economy and that adding liquidity through deficit spending is necessary to keep the wheels turning on a flagging economy until it can gain enough momentum to take off on its own.

This may seem foolish but so far they have been right. No matter how much gold rises in relation to various World currencies, especially the dollar, the change is never going to be regarded as permanent unless the dollar begins to substantially lose its purchasing power and that hasn't happened yet.

Until inflation becomes real to everyday people with food, rent, and other necessities of life rising, increased gold prices are just a blip. Right now it can be argued that the cost of living is in fact, decreasing.

Other arguments against the rise in the price of gold being permanent, are that the increase in price of the other historic monetary metal, silver, is lagging far behind that of gold and that mining companies, with relatively fixed costs of production and skyrocketing profit margins, should be outperforming precious metal itself. If investors believed that the increase in the price of gold was permanent these things would not be happening.

I'm not saying these things won't happen eventually. I'm not saying gold is a bad investment. I'm saying it is a long road ahead. I think it is likely that gold will continue to have strong fluctuations in price as the economy struggles, fluctuations that will see the value of gold much higher and much lower.

Buy low. Sell high.


W.C. Varones said...

Silver lagging gold? Depends on your time frame. 1-year, for example.

Silver behaves differently because it has more industrial use and is therefore more economically sensitive. It's also not as convenient as a store of wealth because you have to store much greater quantities of it.

I hold both silver and gold, more gold than silver, but I wouldn't say silver has been lagging gold. Lately it's been on a tear.

Happy T-day, amigo.

Anonymous said...

Buy high, and hold.

I have just moved my Roth IRA to gold mining stocks. I am convinced that the good ole USA is going to print money until we run out of trees. This may be good for the stock market, since it will tend to follow the easy money, but mining shares and physical gold should do much better.

I could be wrong.


Anonymous said...

I agree wholeheartedly, amigo.

Though I still only have about 15% in gold and gold miners. I'm a diversified pussy.