Gold and the US Dollar

I'm often asked about gold and whether it is in a bubble. People hear the talking heads on TV say that gold is a bubble.....

The same talking heads that missed the dot-com bubble, the housing bubble, and are now missing the current bubble in bonds. But somehow these "experts" see a bubble in gold.

First of all, let me say that gold will go back down a $100 or $200 an ounce soon, but that will simply be a correction in gold's ongoing bull market.

Although it may be more correct to say that it is an ongoing bear market in the US dollar. Remember that gold is priced in US dollars, so as the dollar drops gold will rise.

I always find humorous those ads on TV urging people to take advantage of high gold prices to get rid of their unwanted jewelry...exchanging it for cold, hard cash.

Only the cash isn't all that "hard". From just a year ago, the cash is worth about 20% less the gold people sold a year ago.

This serves to underline the biggest mistake I see both novice and sophisticated investors make. Investors do not take into account the value of the dollars that they own.

Take a simple example. Let's say stock A is trading for $100 a share. Then a year later it is trading at $120 a share. Most investors would be overjoyed - "Hooray, I made 20% in one year on my investment!"

But then let's say, due to the Federal Reserve printing money madly and other stupid federal government policies, the US dollar drops by 25% in value over that year.

In real terms, the buying power of the dollars you invested has declined. So in real terms, you have NOT made 20% on your money, you have actually LOST 5% on your money!

That is how the Feds continue to pull the wool over Americans' eyes. They continue to devalue our currency and then blame scapegoats like China. The problem isn't China...the problem is that the US dollar has been on the decline for decades.

I smile when people boast about how Apple went from $200 to $300 a share. Yes, I ask but how much have you really made. They look at me like I'm nuts.

That's the beauty of gold. It has been a store of value for thousands of years. Gold isn't a speculation or really even an investment.

It is an insurance policy. It protects the value of your assets over the very long-term so you can pass on your wealth to the next generation.

There is no paper asset, including the US dollar, that has ever done that in the history of humankind.

But back to the question of a gold bubble. Yes, it will eventually reach a bubble price, but not for a long time.

Ordinary people do not own gold. Most people couldn't tell you the price of gold within $200. They cannot imagine that the US dollar is not a safe place for their wealth.

Eventually, they will see the light. When that happens, the public will panic and gold will skyrocket in price. $2000? $5000?

Who knows how high gold will go. But the height of the stampede into gold will be the time to sell it. Keep just enough as an insurance policy and move the rest into other assets which will be dirt cheap because of the ongoing panic by the public.