Gold. I'm sure everyone reading this blog has heard about the price of gold. Gold is soaring right now at $1430 an ounce! The markets pulled back while gold and oil shot up sharply today. Clients of mine know that I am a big fan of taking profits and selling nearly ANY stock at historic highs. Well, not this time. Gold is an essential part of all stock portfolios. So, let's dig into what has pushed gold up and look solely at the facts. Bare with me while I frame the argument. I will try to keep it concise!!
As I wrote yesterday, gold is denominated in US dollars. This means that the price of gold is quoted in US dollars the world over. This is extremely significant because of the fact that the US dollar and gold are the most widely sought after and accepted currencies in the history of the world. It's not even close. They are DEEPLY linked.
Unlike gold, the dollar is a fiat currency. This means that a central bank has control over the currency and can print more of it whenever they feel the urge. Furthermore--and this is huge--the government can print the currency without doing ANYTHING at all to account for it: they don't need to put more gold in Fort Knox; they don't need to pay off debt. All the Federal Reserve Bank has to do is flip the switch and print away. The Fed, as well as nearly every other central bank in the developed world, has been printing, and quite vigorously at that. Meanwhile, gold is becoming more scarce because of the increasing demand in emerging markets and the fact that it's an element, and they aren't making anymore. The printing and overspending is taking its toll in global markets that were once seen as unshakable. Greece saw riots in the streets as their insolvent government could no longer meet its fiscal promises. The entire Euro zone is facing the real possibility of defaulting on loans. Meanwhile, our country is running a deficit (meaning simply the amount of our budget that we have to borrow because we lack the revenue) that is over 10% of our gross domestic product. To put this in prospective, we have averaged 3.5% of our gross domestic product for the last 80 years or so. That massive increase in spending is seen as a credit risk for our country. Simply put, the world no longer wants to pay a premium price for our government issued bonds that they once did. We are not seen as the risk free bet any longer. So, what would make investors continue to want to buy our bonds which would enable us to meet our fiscal demands? Well, we would need to pay a higher interest rate. Right? Remember, higher risk = higher interest rates.
I promise I'm coming to a point here, just bear with me. Ok, well we have established that our country is forced to borrow (which just means that they sell bonds) nearly half of our budget every year. But, we also established that investors are going to want a higher interest rate if they are going to take on the ever-increasing risk that is presented by our massive spending. Well, herein lies the problem: if we increase interest rates by 1%, the interest payments our government would have to pay out on those bonds would increase by over $250 billion dollars!! So, we would just be digging ourselves a bigger hole. Ok, enough of that. You get the idea. We are in real trouble. If we continue spending, we will actually get to a day in the not-so-distant future when the interest payments on our outstanding debt will surpass our entire federal budget. No kidding. With all of this going on--all of this deterioration of global currencies--how would gold not go up? Or, has gold gone up or merely adjusted itself to reflect the dilution effect that all of this printing has had?
Gold is the one currency that has not been printing.
Is this making sense? Let me know if I am confusing you. It is just SO important that everyone out there understand the intense severity of what is currently going on and how to protect their family's financial well being from the madness that has taken over our system. I also want to explain WHY gold is a good investment. On Thursday, I will pick-up where I left off and give you some thoughts as to what the best way to invest in gold is. Until then, keep an eye on this market. Oil is at a tipping point and could run much higher which will probably push this market much lower. This scenario should also play well for gold.
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