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Why Watching Gold Will Tell You Everything You Need To Know

24 June 2010 One Comment

Gold is such a fascinating part of this whole financial/economic game we find ourselves participating in. If you’re like me, you watch the markets, the economic news, etc. and gold is easily the #1 wildcard in the whole game.  Gold is very frustrating for the political and banking elite as it provides a barometer to reality, a decoding tool for people like you and me so that we can know what to believe.

This isn’t going to be a pitch where I’m trying to convince you of the merits to owning gold.  If you are engaged at all in what’s going on, you have probably already made up your mind on this issue one way or another, and frankly, I don’t care if you own it or not.  For the record, I think it’s an excellent thing to hold.  With that said, let’s continue.

Alan Greenspan speaking before a Senate committee in 2005 said the following:

We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power.

The above quote essentially sums up government and governments ability to provide welfare, benefits, social security, etc.  It also hints at governments abilities to manage a debt crisis that is spiraling out of control.

The first part of that sentence is very relavent.  Government can and will guarantee cash benefits as far out and at whatever size is necessary.  This is happening now.  This will not change, and I would guess that it won’t change even if Republicans sweep 2010 and 2012 elections.  Why?  Because Republicans will do their best to eliminate wasteful spending, but I seriously doubt they will touch social security, medicare, or defense which is basically everything.  Cutting spending on the peripherals will not be even close to enough.

So, the first part of Greenspan’s quote will continue indefinitely I would say.  Now let’s turn to the second portion of the quote.  Government’s problem is that they can’t guarantee the purchasing power of the cash benefits.  As deficits spiral out of control and quantitative easing continues, the purchasing power of the currency will be impacted.  Thankfully we have a wonderful measuring tool that tells us how much and when the currency is impacted.  That measuring tool is gold.

And, now we see why gold is one of the most important things to watch as the economic crisis continues and as our ignorant leadership pursues the wrong course of action both now and in coming years.  Your home value may double in value and the Dow Jones might hit 25,000, but the price of gold will tell you the real value of such things.  For example, if the Dow hits 25,000, but gold is at 15,000 oz. then it’s fairly plain to see that you’ve lost money by being in stocks during such a run.  Selling gold is clearly not a smart approach to your investing strategy.

If politicians could eliminate gold and the price of gold from the public eye, they most assuredly would.  Gold is what I call their BS-meter.  They can’t manipulate it like they can all other economic data.  As our currency moves toward a state of being worthless, politicians will find themselves out on the street.  If a severe inflationary recession takes hold here in America (which many predict), the average Joe who is barely getting by will be absolutely crushed by skyrocketing consumer prices (loss of purchasing power).  Hopefully, the average Joe is watching gold and increasingly putting pressure on his politician as the price of gold continues to rise.

Indications are that the average Joe is watching gold with increasing interest as the SPDR Gold Trust (GLD) ETF continues to gain in popularity.  As I said in the beginning, you don’t have to invest in gold, but you definitely have to watch it.

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