Wednesday, April 6, 2011

Is Gold Expensive?

How do you know if something is expensive or cheap?  If an item is marked $999 but on sale for $499 is that a deal?  What if the retailer paid $200 for it and $499 was really a staggering markup only allowed by his clever presentation of prices?  He set the expectation for you and that was the basis for your price judgement.

At the current spot price of $1,458.50/oz gold is a screaming bargain.  Most Americans have no idea how to properly analyze the gold price much less determine a fair price, but they unanimously feel confident that the price is too high.

Gold is not a useful metal, it is money.  Gold has always been and will always be money.  A purchase of gold is an exchange of one form of money for another.  If you live and transact business in America the chart below applies to you.  This is a basic example of how the dollar has performed in comparison to gold over the past year.  PHYS is our recommended exchange based physical gold holding and UUP is an ETF that provides the equivalent of long dollar exposure against 8 major currencies.  Most readers are likely to feel nothing when viewing this chart as $1.00 is worth $1.00 in their mind.  That is what we call living in a Static state of mind and it is to be avoided at all costs.
Chart forSprott Physical Gold Trust ETV (PHYS)
The amount of goods and services that a dollar will purchase is declining rapidly.  The United States is facing a situation that when seen clearly should make any sane person determined to have only a necessary amount of dollars on hand.  Dynamic analysis is required to survive and thrive in this environment.

The US Government is a bankrupt entity.  This may be hard for some readers to comprehend but a company that spent $1.70 for every $1.00 in revenue would be labeled insolvent.  Currently there are no consequences for this behavior as the nation's central bank purchases unsold government bonds by creating the necessary new cash electronically.  This is the same currency that your investments are denominated in.

Fox News anchors can not help you feel better about this by explaining that the republicans want to cut $40bil from the budget compared to the democrats who will only part with $33bil.  Last year the deficit was over $1,600,000,000,000 so the savings are 2.1% of the DEFICIT. This is the equivalent of arguing about the logo on the front of the train that is about to hit you moving at 60mph.  There is no need to engage in this debate, save the energy and use it to get off of the train tracks.

There are other investments covered on this site with far more upside potential than gold.  Gold should not be looked at as an investment rather as a store of wealth and an insurance policy against the corrupt behavior of power drunk politicians doling out other people's money and the crime syndicate of bankers that controls them.

Future posts will reveal the proper allocation strategy for achieving large capital gains in gold mining stocks as the price of the metal rises.

Prediction: Gold will stay below $1,600 through the early summer then gracefully ascend to briefly cross $2,000 in late October or early November before closing the year at $1,800/oz.

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