Gold is used as a hedge against inflation. Even Warren Buffett, one of the biggest gold haters, sold his interests in some banks and shifted to gold recently.
But many are still arguing that the uncertain times could push the policy makers to make critical changes in Government’s fiscal policies and gold is the most vulnerable.
They say the Federal Reserve would engage in further monetary easing should economic conditions deteriorate further. The inevitable policy change to higher interest rates and higher taxes will dampen inflation potential and could cripple gold.
That didn’t happen. That has never happened.
In almost every recession and economic depression we have been in, the monetary policies changed in the favor of stimulating economic activities.
This year, The Fed is printing money to encourage people to spend even if it means inflation.
It has pulled interest rates down to zero and has announced it will keep it at a minimum at best.
What has this resulted to? Gold breaking the $2000 mark. The highest in gold’s history.
Does this mean gold tanks when interest rates are high then?
A long-term review of the massive bull market in gold that occurred during the 1970s reveals that gold’s run-up to its all-time high price of the 20th century happened right when interest rates were high and rapidly rising.
Short-term interest rates, as reflected by one-year Treasury bills, bottomed out at 3.5% in 1971.
By 1980, that same interest rate had more than quadrupled, rising as high as 16%. In that same period, the price of gold mushroomed from under $50 an ounce to a previously unimaginable price of nearly $850 an ounce.
In other words, when the interest rates are high, gold increases in value.
When the interest rates are low, gold increases its value. Gold’s increase in value is constant. Why? Because it is one of the very few commodities that does not expire. It does not corrode. It does not rust. It is will always be what it is 1,000 years from now.
We are not saying that gold is bulletproof. We are saying that when it comes to storing the value of your investment, gold is as good as it gets.
So, diversify. Reexamine your investments now that you know better and make sure you have gold because it is the best defense against all economic downturn.