Gold & Silver Market Update

Gold & Silver prices in US dollars have had a wild ride this year.  Both fell dramatically earlier in the year and have had a strong bounce back up over the last two months.  Gold is up about $200 since the bottom while still being down about $300 for the year.  Likewise, silver is up about $6 in the last two months while still being down about $8 for the year.

If you value your silver & gold by the US Dollar price of the day, then it has been a tumultuous time to won them!  Of course, if you value them in the number of ounces that you own, you still have the exact same wealth that you started with.  In other words, if you value your money the way it has always been valued throughout thousands of years of history (instead of valuing it the way the US government has convinced the world to value it for the last 42 years), then you are completely comfortable with the fact that you hold real money.  You also probably know that given enough years, paper currency always falls in value while real money (gold, silver) maintain their value.  That said, it’s understandable that the crash from earlier this year in USD terms can be disconcerting (and this was most definitely the reason for it).  So in today’s post we’ll be talking about what’s been going on in the gold and silver markets and what we see ahead.

First, let’s take a look at the price action (in USD) of gold during the 1970’s.  It can be constructive during periods such as we encountered earlier this year.  Richard Nixon completely disconnected the US Dollar from the price of gold or silver without regard to the constitution.  So it then went up from $35/ounce up to about $200 an ounce.  So if you were measuring your gold in USD terms,  it was worth 6 times what it had been worth 4 years earlier.  That’s a nice return!

What happened next was a bit disheartening for most gold owners.  They saw the price drop from $200 to around $100 fairly quickly.  So again, you were measuring you’re the value of your money in US Dollars, you lost half your value.  So of course, many people sold their gold around this bottom.  What they missed next was spectacular.

Gold proceeded to run up to $800/ounce in 1980.  So if you sold your gold at $100, you missed the opportunity to see it rise eight-fold in USD terms.  If you just held on when it was at $200 and survived the dip, you saw your gold rise another four fold in USD terms.

Of course, if you kept holding on, you saw the USD price fall from the high of $800 for about two decades.

So how do you know when to own gold/silver and when to sell it?  You look at the fundamentals of money and currency, not the price action.  The problems of the early 1970’s were not fixed in the mid-1970’s.  So although the price of gold may have run  a little high and was due a correction, there was no reason to think the run higher would stop until the economic problems in the US were fixed.  This did not happen until Paul Volker came in and was willing to break inflation by dramatically increasing interest rates.

So the two questions you need to ask yourself are….Did the US solve its debt problem?  And did the US stop printing money and start pulling back the enormous amount of money that it has printed over the last 5 years?

The answer to both of these questions is a resounding NO! Until, the answer changes, you probably want to make sure you own some gold and silver.  One of the things we discuss with clients is how to own these and how much to own, but that’s not the point of this post.

We haven’t been very active on this blog this year, but as the last newsletter stated, we are rolling out a new series and this is the first post.  Since the debt ceiling is in the news again, we thought we would remind you of a previous series on the US fiscal state: 1) Fiscal Cliff Intro & 2) Examples of Higher Taxes Lowering State Revenue, & 3) Fiscal Cliff Update.

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