|Home||About Us||Resources||Archive||Free Reports||Market Window|
Thursday, September 11, 2008
I remember August 16, 1971, like it was yesterday.
I was nine years old and standing just outside the two slabs of dirty glass and dull metal that were the front doors of Crest Pharmacy, at the corner of Liberty and Croydon Roads, just south of Exit 17 off the Baltimore Beltway. I can still smell the fumes from the busy intersection where I spent many days each summer, helping shoppers carry groceries to their cars for tips.
The day was overcast and not as hot and humid as Baltimore usually is that time of year. My old maroon bicycle was on the ground next to me. I had a Milky Way candy bar in my hand. I'd just paid 12 cents for it at the pharmacy.
The day before, on August 15, 1971, I'd heard adults talking about Richard Nixon's wage and price freeze. My father told me nobody could raise prices for a while. I distinctly remember looking down at the candy bar in my hand the next day, wondering if it would still cost 12 cents when I was 80 years old. A lifetime supply of cheap candy seemed OK to me.
Aside from the wage and price freeze, Nixon officially destroyed the U.S. dollar. The day before I stared down at my now permanently cheap candy bar, Richard Nixon nixed the Bretton Woods agreement of 1944, removing the U.S. dollar from the gold exchange standard. Redeeming dollars for gold was no longer possible.
It's true Nixon only made official a process the market had already begun. Due to the ongoing U.S. policy of inflation, the dollar was only 55% gold-backed at the beginning of 1971. Foreign countries, correctly terrified by the weakening U.S. currency, were redeeming dollars for gold at an increasing rate. By the time August 15 rolled around, the dollar was only 22% gold-backed. Nixon needn't have bothered.
Suddenly, dollars were worthless. Inflation averaged 5% a year for the remainder of the decade. Nine years later, gold peaked at $850 an ounce. Gold outperformed everything, rising 24-fold from the official exchange rate of $35 an ounce. In the 1970s, gold was the trade of the decade.
Gold has been the trade of the decade for the 2000s, too... Though it has put in a less impressive performance compared to the '70s. Since gold bottomed in 1999 at $252 an ounce, its price has risen less than fourfold. If gold were to repeat its 1971-80 performance, it would hit $6,000 an ounce this year.
While the gold-price history hasn't repeated yet, the historical circumstances certainly rhyme. Today, as then, we face an increasingly expensive foreign war, a debt-burdened population and government, high inflation, and large, growing trade deficits. A Milky Way costs about five times what it did in 1971.
This is all good to know. But I'm not telling you to speculate on the price of gold, any more than I would tell you I know the intrinsic value of gold. I don't, nor do I know anyone who does.
All I know is what's happened in the past and what appears to be happening today. Throughout history, gold has been an adequate store of value when currencies have blown up. Because of what's happened in the past and what I believe is happening now, it is imperative you own some gold, some real gold, gold you can bite down on, gold that clanks. Once you trade in your dollars for bullion, it's out of the government's hands.
I don't recommend buying the SPDR Gold Shares ETF (GLD). Sooner or later, it'll become clear the ETF is not gold. It's a stock. When panicking investors need to liquidate securities portfolios, they'll sell the gold ETF with a mouse click, the same way they'll sell Google. Once your gold is in your hands, you're less likely to sell into that panic.
Don't check the gold price every day to see if you're "making money" on your physical gold. Nobody knows where the gold price will go – not you, me, or anybody else.
As with stocks, it's not necessary to buy all your gold at once. Think of gold as savings. The way to save effectively is to start immediately, never stop, and save a little every week or month. Make the amount small enough to be painless. That way, it's easier to establish as a habit. Start today.
I buy South African Krugerrands. Any decent bullion coin will do. Some people prefer gold bars. That's fine, too. Whether coins or bars, just go out and buy yourself some plain, ordinary gold.
IT'S STILL A BULL MARKET IN CHEAP
Germany... China... Israel... Canada... Korea... Russia... Austria.
This isn't a roster of the United Nations... but a list of world stock markets scraping new 52-week lows. Nearly every oil, mining, and infrastructure stock you can name is at a new low as well.
In other words, there isn't much working in the stock market right now. One of the few uptrends we can find is the "bull market in cheap"... the year-long uptrend in shares of Wal-Mart.
Wal-Mart is the world champion of cost-cutting and delivering products cheaply. You can read more about the company's exceptional managementfrom Dan Ferris... and why Wal-Mart is a great "recession investment" from Tom Dyson.These two ideas are driving the uptrend you see below...