Yes, of course, gold appears too expensive now (a bit under $1,700 as of this writing) compared to an under $300 price back in 2001. Gasoline was $0.15 per gallon back in the 1950s, and it is approaching $4 per gallon today. Does its current high price stop you from purchasing gasoline? Of course not. We need gasoline to drive our cars, so we pay the price. We need gold to preserve our purchasing power, since interest rates are now practically zero and long bonds are returning under 3%. Most other investments have not kept pace with the real rate of inflation experienced by the middle class in the United States.
So, is gold expensive at $1,700? Compared to 2 years ago, 5 years ago, and 10 years ago – YES! But the past is the past; the real question is what will be the price of gold five years from now? A five-year Certificate of Deposit might return 6% or even 12% over the course of five years. So do you think gold will be priced higher than $1,700 plus 12% – about $1,900 in five years? I do. In fact, I fully expect gold to exceed $1,900 by the end of 2012 or in early 2013.
What about safety? The CD is probably safe – you are likely to get your dollars back. But, what will those dollars be worth in five years when the Federal Reserve is diluting the value of trillions of existing dollars by creating hundreds of billions or trillions of new dollars each year?
Gold has been increasing in price by about 15% per year for the past decade. That tells me that our economic system worries many people who are buying gold for protection and that the supply of dollars must be exponentially increased to keep the system from imploding. This might not end well for the dollar, but I expect it will end quite well for the price of gold and for your purchasing power if you put some savings and investments into gold.
This is just my opinion, but the price of gold seems to agree with me. What do you think? What preparations have you made to preserve your purchasing power?
aka Deviant Investor
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