Confused about gold and the DJIA? Don’t be.

Thoughtful question from would-be gold owner/my answer

Michael,

I have been reviewing your web site and am impressed.

I currently have about $750,000 in cash, money market funds, equities and bonds. I am 74 and my wife is 72. We are both retired.The only fixed income we receive is $21,000 per year from social security, and $7,000 per year in bookkeeping fees earned by my wife. Our living expenses are about $75,000 per year leaving us a shortfall of about $36,000 per year. Our total net worth is about $2,200,000 (home is $1,500,000 of that).

When I read your article Choosing a Gold Firm about 3 weeks ago, I felt motivated to jump in to the gold market. However, it seems that the value of an ounce of gold has dropped to about $1,100. What confuses me is the fact that the DJIA, is right now less than it was at the first of the year. Based on what I thought I knew, I expected to see gold soaring, but the reverse is the case.

What should I do? Is gold at a bottom? Should I get in now, or wait?

BN
Charleston, SC

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Hello, BN.

Gold rarely goes by a predetermined schedule. Some would say it is rather obstinate. It goes where it wants to go in its own time and there are all sorts of forces at play with respect to its pricing – a situation of which I am sure you are fully aware. I have never believed that people should own gold because they think it is going to soar in price in the short term. Gold is first and foremost portfolio insurance and a longer-term alternative savings plan where asset preservation is a key objective.  Secondarily, it is an investment for capital gain. As a result, if one goes into gold ownership with the attitude that it is simply a workable alternative to stocks or bonds, then short term price fluctuations should not serve as discouragement to either current or would be owners.

Can you guess the gold owner?

None of the conditions that caused gold to rise from the $300 level to the $1800 level pre- and post-crisis have changed, and ultimately they could reassert themselves down the road perhaps in ways most of the analysts never dreamed. The reasons for owning gold are as strong today as they’ve ever been and perhaps even stronger given the socialized, artificial values at work in other markets.

It is unfortunate that you have come to this place in your life (at 74) only to find that your savings will not do for you what you had hoped and I empathize with that. Investors are forced into speculation in stocks, real estate and other ventures when they should be living off a fair annual return on their bank savings. I don’t think those circumstances are likely to change any time soon. If I were to guess at this juncture, I would say that even if we do get increases in interest rates, they will be small and nearly inconsequential and you will be in no better position than you are now.

From my perspective, gold is among the most undervalued of the major portfolio assets at this juncture. I am not the only one who believes that. Recently Interest Rate Observer’s James Grant announced “Mr. [Gold] Market is having a sale.” Similarly, Tocqueville’s John Hathaway commented  that “Evidence suggests the bull market in gold is far from finished.” (More on that “Evidence” in an upcoming News & Views.  Sign-up here to receive your complimentary issue by e-mail when released.)   Contrary to characterizations in the mainstream financial media, global physical demand is soaring in the wake of the recent artificial price drop and very strong among our firm’s clientele. Web site visits to USAGOLD have increased markedly and inquiries are at a level not seen for years.

In short, a large segment of the public believes gold is a buy at these prices. Much of this is due to a major change in financial market psychology that has evolved over the past several years. Now there is a very large group of people out there who believe in gold, and not just in the United States. That belief cannot be suppressed no matter how hard the mainstream press tries. An equally large contingent understands that markets supported artificially are ultimately doomed to failure and potential collapse once the props come down.

In the end, you will need to make a decision on three matters:

1. “Do I believe that the current economic situation warrants hedging?”

2. “Do I believe that gold is the hedge that will get the job done for me?”

3. “Do I own enough gold with respect to my total portfolio to make a difference?”

If the answers in respective order are yes – yes – no, then you should add more gold to your portfolio and it should be in the proper form – gold coins held in your possession.

My continuing golden wishes to you and family,

MK