Friday, July 3, 2009

Why should one own gold?

The answer is to preserve your purchasing power. Everyone seems to be worried that during a deflationary period the price of gold will drop. First off let me explain something. Gold is money. Has been for the last 5000 years.

Let me also point out that during a deflationary period money becomes more valuable. During the last deflationary period of the Great Depression the only thing that went up was gold.

From September to March we just experienced a massive deflationary shock. So what happened to money during this period? For one the dollar exploded higher. For instance, you could buy a gallon of gasoline (at least here in Vegas) for about 1.6 dollars.

Now a gallon of gas is always going to be a gallon of gas, that didn't change. The only thing that changed was the value of our currency.

Last year it took 4.3 dollars to buy a gallon of gas and this winter it dropped to 1.6.
The value of the US dollar increased by almost 300% when expressed in purchasing power based on a gallon of gasoline.

In September before the deflation hit 1 oz. of gold would buy 300 gallons of gasoline. At the height of the deflationary panic gold bought over 1000 gallons of gasoline. A little more than 300% increase in the purchasing power against our measuring standard...a gallon of gasoline.

These three charts are going to look similar whether you measure purchasing power in a specific commodity, college tuition, housing or a loaf of bread.

Folks gold is money and in a deflationary environment money becomes more valuable. So when I see people freak out because gold drops a little bit I have to wonder what they are thinking. They haven't lost any purchasing power, as a matter of fact, they have made a tremendous gain. A gain that any one of us would be ecstatic about if one had the insight to see the real picture.

Now consider the mining stocks and how undervalued they are right now. You want to talk about a gain in purchasing power over the next couple of years? Don't even get me started.

And people wonder why I won't sell any of my mining stocks. Deflation? Bring it on I say, I'll be happy to gain another 300%.