What Gold Prices Are Telling You

Gold prices are going through the roof along with many other precious metals. So, just what are gold prices trying to tell you? Let’s take a closer look at the subject. 

Gold prices have quadrupled in the last 10 years. As I write this, they are in excess of $1,300 and surely still headed up. Some people see this as an investment opportunity of a lifetime. Others see it as an indication that America is about to fall off the edge of a cliff due to economic issues. What does it all really mean? Let’s take a look.

Gold is viewed as a safe harbor investment in times of trouble. It has gained little value over the last 100 years, making it a bad long term investment. In troubled times, however, it is tremendous because it will often spike quickly and come down just as quickly. This provides you with an opportunity to buy on the way up and go short on the way down. 

The current rise in gold prices is due to the Great Recession. This is a bit of misnomer. By most technical definitions, we’ve been in a second Great Depression. Regardless, there are two primary reasons gold is a hot investment at the moment – dollar devaluation and inflation.

The Great Recession has gone along way to revealing to the American public who is really in charge of our government. While Congress and the various Presidents make policy choices on non-economic matters, it is the Federal Reserve that really guides the economy. It has been working very hard to get us through the current mess. That being said, it is nearly out of ammo to continue the fight and that is sending major tremors through the market. 

The first issue is the threat of inflation. It may seem small now, but the policy of the Federal Reserve to pursue “quantitative easing” means it will rear its ugly head sooner or later. Quantitative easing simply means that the Fed is creating money out of thin air to pump up the economy. This devalues the dollar and gold is the perfect hedge against said devaluation. 

The second issue is the long term economic viability of our government. Simply put, the politicians spend more than they take in. You are probably either a Republican or Democrat. It is important to understand that problem has occurred with every administration regardless of political affiliation. Ronald Reagan ran deficits. So did Bush Sr, Clinton, Bush Jr, and now Obama. Ironically, Clinton was the only one to have created a surplus at any point during his term, but even that was fleeting. 

The big fear with the national debt is we really don’t have any plausible way of paying it off. It is currently in the thirteen trillion plus range. By 2020, it is conservatively estimated to be in the twenty trillion dollar range. Thrown in unfunded liabilities for Medicare, Social Security, the Prescription Bill and other programs and we are looking at a real national debt in the sixty to one hundred trillion dollar range. 

The question is what will happen when the bond market finally wakes up and realizes we can’t pay this money back? When that happens, investors are going to demand much higher interest rates and we could see the government and economy grind to a complete halt. This will kill off the dollar as we know it.

There are two possible solutions. The first is for the politicians to get their act together and start addressing these issues instead of avoiding them. The second is to buy precious metals like gold that will spike upwards in value when the bill comes due on the debt. The rising price of gold in the markets should tell you what investors think is going to happen!

Contact us today to learn how to put together a strategy to protect yourself from taxes, inflation and currency devaluation in the future.