I’ve been asked that question a lot, especially in the last month or so. Over the past year I have consistently advised against investing in gold and that advice has been pretty good as the price really hasn’t changed much. I do believe there will come a time when owing some gold will be a very good idea, but I don’t believe we’ve reached that point as yet for a variety of reasons.
Right now, the world is running to the U.S dollar as the #1 safe haven. I believe we will reach a point, however, when the dollar will become anything but a safe haven. The wasteful runaway spending of the federal government for the last 10+ years, the printing of over a trillion dollars a year for going on the 5th year now, and the low probability that our elected officials will ever do anything meaningful about the currently massive level of our government’s debt and unfunded obligations will all eventually come home to roost.
I am convinced that high inflation, driven by a significant and possibly major erosion of the dollar has become unavoidable, that it’s just a matter of time. Such an event is almost certain to cause a big increase in the price of gold. The question is when, and there I haven’t a clue. Can we make it another 10 years? No way. 5? Highly doubtful. 2-3 years? Maybe. There’s just no way to predict when the value of the dollar will begin to drop.
So what do you do? My best advice is to wait for the first reliable signs that the dollar is beginning to slip relative to other currencies and/or that inflation is taking off and that the price of gold has begun to rise in response. At that time, despite gold having already risen some, it will be my recommendation to buy a modest amount of gold. I will continue to track the situation and keep readers updated through my Smart Alerts, so sign up if you are interested.
There is also another approach that some recommend—to buy if the price drops a little further yet, say to $1500 an ounce. Many people advocate such a strategy, but I do not, as the risk that the price of gold could drop a lot further before it begins its rise is just too high. Believing that, I’d rather wait for the above events to have reliably begun.
Even if the price drops to $1400, I still hesitate for several reasons. With gold in the grips of traders, as it is currently, the situation is just too unreliable for my taste. Take the price low enough and I’ll probably do a little buying but that point is a good deal lower than today’s prices, maybe in the $1250-$1300 range, depending on how things play out.
Also, I expect the situation in Europe to get worse yet, and when it does European banks are likely to be forced to sell a lot of their gold holdings to cover their losses. India is also a truly major gold buyer and pressure is rising inside the Indian government to greatly reduce that by further increasing tax rates on gold purchases. Their economy isn’t doing well and they appear to feel that more investment money should be diverted away from gold to things that can help their economy, which gold does not. Both of these foreign influences have the potential to drive the price down, and possibly by a lot.
In summary, I believe gold will end up a very desirable investment at some point, but the best bet is to give up any possible gains that might occur in the short term and wait for the first clear signs of erosion of the U.S. dollar and/or that inflation is taking off and gold prices have begun rising in response. When that happens I believe it will be a good idea to own some gold, say 10% of assets. This is what I plan to do.