Should I buy gold
at its all-time high? By Simon Black |
July 27, 2011
There’s one question that I’ve been seeing
over and over for the last several weeks as the price of
gold has taken out its all-time highs and continued a nearly
uninterrupted ascent: Should I buy gold now?
It’s understandable, especially for people who don’t
own precious metals yet. Nobody wants to be the sucker who
buys gold at the top, only to watch it crater back to $1200
or below. But here’s some food for thought–
The US dollar is shattering historic lows against currencies
like the Swiss franc, Australian dollar, and Singapore dollar.
Any currency that isn’t a complete disaster is now
being viewed as a safe haven. And the mainstream world is
now, finally, waking up to the reality that the United States
might actually default.
Never mind that the government has been insolvent for years
and the evidence of such has been widely available to anyone
willing to look at basic facts. Literally, only in the last
week have people finally began to consider the possibility
of a US default.
Here in Europe, the situation is arguably even worse. No
one is being shy about a default in Greece– it’s
discussed openly now by policymakers, and major financial
institutions are preparing for a restructuring. And with
its public debt more than 120% of GDP, Italy will not be
far behind.
Governments no longer have the benefit of operating behind
a curtain; their financial imprudence and technical insolvencies
are now under the spotlight for all to see… and confidence
is fading quickly.
The more people lose confidence in the dollar and euro,
the more they look for alternatives. Large institutions
and money mangers collectively control trillions of dollars
within the financial system. Unallocated capital–
funds held as cash and not being actively invested at the
moment– must be held somehow, somewhere.
This is the chief reason why so many smaller currencies
are surging. Compared to the dollar and euro, the Swiss
franc looks incredibly safe, and money managers have a much
higher degree of confidence that their Swiss bonds will
be repaid than they have in the US or eurozone.
The more capital flows into these smaller currencies, the
more they’ll appreciate against the dollar and euro.
It’s simple matter of supply and demand– increased
demand for the Swiss franc coupled with excess supply of
US dollars means a stronger franc in US dollar terms.
Ultimately, this is the primary reason for gold to go higher
in the long term.
Large financial institutions are increasingly looking at
gold as a safe haven; it’s becoming less of a speculation
and more of a store of value… and unlike most of the
other available asset classes, precious metals are not politically
sensitive.
Even stronger currencies like the Swiss franc have limits
to their appreciation. At some point, the Swiss National
Bank will impose capital controls to thwart the rise of
its currency. Oil and agricultural commodity prices will
likely be regulated and speculation outlawed if prices become
too high.
But if gold goes to $2,000… $3,000… it may
be an embarrassment to central banks, but it won’t
become a populist issue. You won’t see any Tunisian
merchants setting themselves ablaze because the price of
gold is too high… and not too many politicians looking
to fix the price.
Even if they do try to regulate gold prices or even make
it illegal, you can be sure that the gold trade will continue
to thrive in the rest of the world– especially in
Asia and the Middle East.
So instead of worrying about buying gold at its all time
high, ask yourself another question instead: Over the next
few years, do you expect that these broken, bankrupt governments
will inspire confidence among institutional investors, or
do you think that confidence will continue to erode?
If you’re leaning towards the latter, you can be
sure that more money will flow into gold, and that prices
will rise.
Yes, there will be price fluctuations. Whenever the US
government announces that it has finally reached a debt
deal, there will probably be a correction. Given what’s
coming in the next several months and years– debt
downgrades, more budget battles, government shutdowns, asset
seizures, etc., any correction will be a small blip along
a long-term rising trend line.
And in case you’re still worried that you’d
be a sucker to buy gold at $1600, consider that, if you
don’t, in three years you’ll probably feel like
a sucker for not buying gold at $1600 when you still had
the chance.