The Continued Case for Gold

As I write this issue of PROFIT CONFIDENTIAL, I note the price of gold rose about $10 today, to $403 U.S. per ounce. My readers are all too familiar with my personal fondness of gold bullion and gold stocks. The recent run-up in the metal’s price adds to the continued case for investing in gold.

Among other factors:

— Technically, gold is in a bull market, with bullion prices up 60% from their 2001 low of $250 U.S. per ounce. Investors in gold have averaged a rough return of 20% per year on gold investments over the past three years.

— Today, the cost of 24 ounces of gold is equal to the index level of the Dow Jones Industrial Average. In 1896, only one ounce of gold was equal to the DJIA. In 1932, two ounces of gold were equal to the DJIA. And as recently as 1980, one ounce of gold was equal to the DJIA. Looking at a price chart of gold bullion from 1900 to today, each time it takes more than 20 ounces of gold to equal the DJIA; the ratio relationship always returns to at least two to one, being two ounces of gold to equal the DJIA.

— After bringing interest rates down to their lowest level in 46 years, many economists believe the Fed was too slow to raise rates from their 46-year low. The Federal Funds Rate (the rate at which the Fed lends money to banks) has been below the annual inflation rate for 20 straight months. This is the longest stretch of negative real interest rates since 1974-1976-a period the Fed is now widely acknowledged to have kept too lax of a monetary policy, ultimately leading to the double digit inflation rate of that period.

— The record debt levels of consumers and government today could eventually affect the long-term stability of the U.S. dollar against other world currencies. Under such an economic environment, gold bullion shines.

The above are but just some of the factors working in gold’s favor today. Yes, gold bullion price can be volatile. But from this economist’s point of view, gold should not be traded for profits, but rather held as a hedge against traditional paper investments.