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Published: July 27, 2010
U.S. debt is skyrocketing with no end in sight. And while
the dollar has recently functioned as a short-term safe haven,
its long-term fundamentals are deteriorating.
To put it in perspective, U.S. public debt in 2000 was $3.4
trillion. That has now more than doubled to $8.6 trillion. The
rate of increase is skyrocketing, with
deficit spending of $1 trillion in 2008 and $1.9 trillion in
2009 alone. Current Congressional Budget Office estimates total
debt of $5.8 trillion in 2008 to more than double to $12.6
trillion by 2014. That means in the six years (from 2008 to
2014) the country will borrow and spend as much money as it had
since its founding in 1776 all the way up until 2008.
A
currency is typically as strong as the economic fundamentals
behind it. The Government Accountability Office (the U.S.
government's auditor) recently said the United States is on a
fiscally "unsustainable" path. This skyrocketing debt will
likely cause a devaluation in the dollar, and many are
forecasting runaway
inflation if we don't get our fiscal house in order.
As a result, many predict the dollar will resume its plunge
during last decade when it fell more than -40% against other
major currencies.
So if the dollar can't satisfy the world's penchant for safety
amongst unprecedented uncertainty, what can?
How about gold?
Gold serves as a safe-haven investment, holding
intrinsic value in uncertain economic times and isn't tied
to the fortunes of any country or currency.
Gold prices have more than quadrupled since 2001 when it traded
for less than $300 per ounce, but this could be just the
beginning. Today's uncertain markets are prompting a trickle
into gold that could turn into a flood in the months and years
ahead. Just this year, the price of gold has risen +23% to about
$1200 an ounce from the average monthly price of $972 in 2009.
Recent strength in the price of gold portends well for the
future. The last time gold had a sustained bull run, the price
increased 40-fold from an average of about $35 an ounce in 1970
to a high of more than $800 an ounce in 1980. Gold Prices in the Past 36 Years
I think the bull run in gold could just be getting started.
And as my colleague Nathan Slaughter mentions often, gold is
still well off its historical highs when adjusting for
inflation. Just take a look at the chart below.
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SPDR Gold Shares (NYSE: GLD) is an
exchange-traded fund (ETF) that seeks to replicate the
performance of the price of gold bullion. The fund is a pure
play on the price of gold as it holds the physical metal itself
as opposed to equity shares of gold mining companies or other
less direct gold plays. Each share represents about one tenth of
an ounce of gold bullion at current market prices.
This ETF is a fantastic modern day investment that makes owning
gold just as easy as buying a stock or
mutual fund. Unlike the old fashioned way of investing in
gold which involved taking possession and storing the actual
metal, GLD enables investors to own gold through an easy to
purchase vehicle with NYSE liquidity. Investors can buy or sell
shares at will any time the market is open.
Gold is a great way to hedge a portfolio against inflation and a
falling dollar, but it is a tricky investment. It's not
necessarily a
hedge against down or volatile markets. In fact, gold prices
actually fell below the yearly averages in the peak months of
the financial crisis in late 2008 and early 2009. As well, gold
doesn't necessarily perform badly in up markets. While U.S. and
world markets soared in the past decade, before the financial
crisis, gold prices rallied at the same time.
More than anything else, gold is a safe haven currency
substitute during times of uncertainty or inflation. And these
uncertain times are enticing investor appetites. According to
The Wall Street Journal, central banks are increasingly shifting
money out of euros and into gold. This led to gold hitting an
all time record high price of $1243 an ounce on the New York
Mercantile Exchange in early July. If uncertainty continues, so
could the exodus into gold.
Action to Take --> In the
short term, the price of gold can be volatile and unpredictable.
But, given the extraordinary degree of uncertainty in today's
economy and the possibility of inflation in the future, it's a
prudent hedge to have some exposure to gold. GLD is a great way
to not only hedge a portfolio, but also gain exposure to a
possible massive run in gold in the years ahead.
-- Tom Hutchinson
Staff Writer
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