This is one of my posts (which I have now revised) from earlier this year in which I argued why it was prudent to buy gold.  I thought its core message might resonate well today given the impending federal bailout, and the possibility that the U.S. is heading into a deep recession. 

The issue here is that, when you consider the loss of wealth that awaits many people in this country, particularly those invested in the stock market, remember that hedging against these types of drops and downturns involves investing in tangible assets, particularly gold.

Here are some compelling reasons to buy gold as a safe haven for your money:  

1) Bet Against The U.S. Dollar.

The dollar has hit record lows this year.  However, a government bailout of bad debt creates more inflation and, thus, puts even more pressure on the dollar. 

There is less and less of a demand for the dollar.  Moreover, the Federal Reserve continues to increase the supply of dollars.  These trends show no signs of slowing down.  In basic economic terms, when you have a low demand for something and a high supply of it, the price of that something inevitably goes down.  

Thus, the dollar is losing value, and it will continue to lose its value.  Instead of holding onto the dollars in your bank account or IRA, it is better to take some of those dollars and buy gold.  By trading those dollars in for gold, you preserve the value of your money.

2) Inflation.

Obviously, increasing the supply of dollars accelerates inflation (which is a rise in the general level of prices over time).  More dollars in circulation means that those dollars have less purchasing power.  A decline in purchasing power means that more of those dollars are required to buy consumer products.  Hence, the rise in the level of prices. 

If you take some of your money and buy gold, you take that money out of this vicious cycle, and you help it maintain its buying power by, instead, pegging it to the price of gold.

3) Bet Against Oil.

The price of oil rose this year for several reasons, and I would argue that we’re not out of the woods yet. 

First, as the value of the dollar decreases, oil producers demand more dollars per barrel of oil.  They demand more dollars because the dollar’s purchasing power continues to fall.  (When oil producers accept dollars for oil and then turn around and use those dollars to buy other things, those dollars are buying less and less of what they need.  Thus, they are forced to raise their prices and demand more dollars.)

Second, the supply of crude oil that is easy to produce is decreasing.  (Although the U.S. Congress plans to let the moratorium on offshore drilling expire, there are rumors that, next year, it might push to reinstate the moratorium.)  Extracting heavier crude oil and harder-to-find oil will cost more, and that cost will be passed along to the consumer.  Inflation will also rise as a result.

Buying some gold, again, takes your money out of this equation.  You’ll have less eroding dollars that buy you less gasoline.  Instead, you’ll create a safe haven for some of your money and protect it against the rising price of oil and inflation.

4) Historical Relationship Between Gold And Oil.

According to the historical relationship between gold and oil, if the price of oil keeps going up, the price of gold should skyrocket.  Historically, gold has traded at about 18 times the price of oil.  Today, and for the last 5 to 6 years, gold has been trading at about 9 times the price of oil. 

This means that gold is cheap.  If history is any indication, the price of gold will correct itself.  Thus, oil at around $100/barrel will inevitably lead to gold soaring to $1,500/ounce or $2,000/ounce.  And this rise could take place within the next couple of years.  Moreover, if the price of oil rises again to $140-per-barrel heights, gold could soar into the range of $2,500/ounce. 

5) Yes, Gold Is Cheap.

In addition to the gold/oil trading ratio, there is another reason why gold is cheap.  Before gold eclipsed the $800/ounce mark, the previous all-time high for gold was $875/ounce in 1980.  In today’s inflation-adjusted dollars, that high would translate into approximately $2,300/ounce. 

Thus, gold has yet to reach anywhere near its previous all-time high.  So even if you think all this “buy gold” hysteria is just hype, and that the price of gold is merely the product of cyclical trends, it is still a great buy because it has not reached the peak of that cycle.  Gold at $900/ounce is a bargain. 

6) If Oil Falls, Gold Is Still a Good Buy.

Even though the price of oil has recently dropped (and may drop some more), the dollar will still be weak.  A decrease in the price of oil will likely be due to factors unrelated to the dollar.  The dollar will continue to lose value.  Historically, the dollar and the price of gold move in opposite directions.  When the dollar goes down, gold goes up, and vice versa.

If this bailout goes through, the dollar will lose some more value.  This will, in turn, push the price of gold up.     

7) Gold Is Real Money.

Remember that gold has real, tangible value.  It is real money.  (So is silver.)  The dollar is a paper currency with no intrinsic value.  It only has value because the Federal Reserve says it does.  Holding some tangible assets is always better than holding your entire net wealth in dollars alone.  The value of tangible assets stays the same, while the value of dollars has eroded and will continue to erode over time. 

8) Supply of Gold Is Decreasing.

The supply of precious metals like gold and silver is dwindling.  Combine that decrease in supply with an accelerating increase in demand (as I described above), and the price of gold will continue to go up.

9) Bet Against The Politicians. 

If Ben Bernanke, the Federal Reserve chairman, wanted to save the dollar (i.e., save its buying power), he would raise interest rates.  Raising rates increases demand for the dollar, which, in turn, slows down inflation.  The problem with this strategy (aside from the fact that it would NEVER happen in this economic climate) is that, generally, people would stop spending their money and move it into savings.  This trend would slow down the economy and almost certainly move it into a recession, notwithstanding the downturn that is already around the corner.

But Bernanke didn’t do this, most likely because he was trying to prevent a recession.  The Federal Reserve kept lowering the federal funds rate and printing more money.  These actions increase inflation.  They might delay an economic recession, but they inevitably push the dollar towards collapse.  And the Federal Reserve has shown no signs of changing its course.

Bernanke took the wrong approach.  The choice was between saving the dollar or preventing a recession.  He chose (and continues to choose) the latter–trying to keep the U.S. economy from falling into a recession.  In the long term, however, the dollar is more important.  Recessions occur in cycles and result from normal market forces.  To save the dollar, he needs to raise rates. 

The lesson?  When in doubt, bet against the government, even if it’s acting through a private surrogate like the Federal Reserve.       

10) Many Analysts Agree That Gold Will Skyrocket

I don’t usually put much stock into what “analysts” advise regarding investing.  Nevertheless, approximately 40 analysts, hedge fund managers, CFO’s, investment officers, strategists, newsletter editors, and experts have agreed this year that gold is cheap, a great buy, and that its price will continue to rise. 

How Do You Invest In Gold?

Don’t worry, you don’t have to go out and buy gold bullion and find a safe place to store it.  Instead, you can invest in gold in two easy ways:

-Street-TRACKS Gold Trust (an exchange-traded fund that tracks the price of gold).

-Buy stock in gold mine operators.  Some of these include Barrick Gold, Coeur d’Alene, Glamis Gold, Newmont Mining, and Goldcorp.

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