Should You Buy Gold?

Right now it seems everyone is rushing to buy gold. This has all the makings of another bubble based on panic and the need to find a safe haven. Gold sellers cannot keep up with the demand. Multiple Web sites have appeared almost overnight offering to sell you gold over the Internet.

In normal times this would probably be fine as regulators and laws would be in place to hopefully protect you from fraud. But times are not normal and if they get really bad can you be certain your gold will be there if you need it?

The world is a very different place from 1929. Its wired now and information moves at the speed of light. So do rumours and panic. Will you be fast enough?

Gold is not an investment. It is used in times of trouble as a store of wealth. However once the financial crisis is over gold is likely to behave like all commodities and take a dive.

The problem is theGold Price 1975 to 2009 courtsey of public, namely you and me will get killed in the rush to get out. That’s the problem with commodities. They can run up to very high prices very fast and fall just as fast.

Take a look at the gold bubble in 1980 if you need to be convinced. The chart is courtesy of

Kitco Bullion Dealers

There is no income for speculators from gold if it does not keep going up.

Unless you are a knowledgeable and skilled trader/speculator the chances are you will lose any gains you make and possible lose much of your invested capital.

Why? because the public in general does not know when to sell. Then when prices fall too far they wait and hope the market will go back up so they can exit them. Sometimes they are lucky but most times it just falls further and what was a trade becomes a long term investment.

I have found many Gold web sites conveniently only show a chart of the last 5,10 or 20 years. The gold bubble of 1980 is not displayed and this completely distorts the gold chart for the uninformed buyer – the public.

Think about it. Look at the chart above from 1975 until now. If you had bought gold before 1980 when it ran up to $750 would you have been quick enough to sell. If not you would have had to wait until 2007 to get back to even – 30 years.

I’m saying as a baby boomer don’t look at gold as an investment. It is purely a speculative play unless it is to use to buy food and shelter. You are betting that paper money will lose its value and gold will become the currency for a time.

Under this basis then buying a small amount of gold makes sense.

If you expect the world economy to break down completely and paper money become worthless (hopefully for a short time only) then physical gold is the way to go.

The next problem is who is going to keep it for you. With respect if social unrest becomes the order of the day and gold the currency, then having your gold locked up in a safe in Perth or New York doesn’t make much sense to me.

If the world as we know it does end, will gold be safe in any bank or mint? Anyway how will you get it so you can use it to buy food?

So it is probably best to buy a little gold. Enough to keep you for some months perhaps. No one knows. You will need to have it in small amount easily tradable. You will need to find a good place to hide it too, close to where you live.

The financial crisis will be resolved at some point in time. Then almost overnight market confidence will return as if by magic. Then all the gold speculators and traders will be selling like crazy. It is likely they will have a ready outlet for the sale of their gold because they know the market and how to move out of gold quickly.

You will watch in awe as the gold price drops like a stone and you can’t find a buyer for your gold. Each time you set a price you are prepared to accept the price moves below it. You will end up chasing the price down. That’s why purchasing a large amount of gold can work against your best interests.

So only buy enough gold to cover your estimated needs. Only buy what you are prepared to lose if the economy turns round and gold loses its attraction. The stages of a Boom and Bust Cycle

I’ve read on the Internet that gold could go to $5,000 or $10,000 in the next few years because it will take years for us to get out of this credit crisis. I may be wrong but have you looked at the gold chart. It’s parabolic and looks like the chart on the right which we know to be the “Bubble” chart stuck on your fridge.This is unsustainable in my view unless….

The only way gold can get to $10,000 is through a massive devaluation of the US Dollar. This could happen with the amount that is being printed right now because the big fear is deflation.

Mr Bernanke’s answer to deflation is to inflate the money supply. Too much money chasing too few goods, including gold will gives rise to inflation. As inflation devalues the dollar, Gold will increase in dollar terms. Hence $10,000 in devalued US dollars may well be possible in this scenario.

As I said I’m not saying don’t buy some gold. If you are buying just in case you need it to live on, then fine go ahead and buy a small amount and bury it somewhere you can get to it if you need it.

Here is an excellent article, “The real gold price – Inflation adjusted gold” which account for inflation on the chart. Whilst this article is written by a mathematician the only chart most of us will see is the Kitco chart and we will use it for our buying decisions.

With inflation adjustment the real price of gold in 1983 dollars may well be about $250 now extrapolated from his approximately 2006 data. So there is no bubble yet. But as I said buy it to have available if you need to for food and shelter, not as an investment.

Don’t speculate with your nest egg in any commodity.

It does sound awful but planning for the worst and expecting the best is survival 101.

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