Gold: The Safe Bet in the New Economy

Gold evokes a range of opinions, none of them moderate. Some traders and investors consider it a barbaric relic in modern finance, as it is no longer a medium of exchange, a form of currency, or the backer thereof. Others consider it to be salvation, the only universally accepted measure of wealth and an island of stability in an a sea of uncertainty.

I obviously champion the merits of gold, or I wouldn’t be writing this article. However, I try to use reason and rational discourse to back up my position rather than emotion or allusions to apocalyptic doomsday scenarios. My rational opinion is that gold is the investment to make in the upcoming years, and that it will be the only investment resistant to stagflation, which I feel is the most likely direction that the economy is moving to.

Stagflation, for those who don’t know, is the awful combination of stagnant economic growth coupled with high inflation. If you remember the 1970’s, you remember stagflation here in America. If you’re familiar with the economic turmoil in Japan in the 1990’s, Japan’s lost decade as it were, then you are aware of stagflation.

When stagflation appears, certain investments are big winners, and certain investments are big losers. Stocks often flatline. For example, from the early 1960’s to 1982 the Dow Jones Industrial Average traded between 700 and 1,000 points. That coincides with the time that America was dealing with stagflation. Add a zero, and you’ll know what to expect if stagflation reappears. Bonds also get hammered - with inflation comes rising interest rates. As new bonds are issued with higher interest rates, old bonds lose value. The only survivor are commodities like gold. With a relatively unchanging supply, gold prices rise almost lock-step with inflation, preserving value. As an example, gold hit its all time, inflation adjusted high in 1981, just as America was emerging from two decades of stagflation.

So how can consumers benefit? Unless you have A LOT of cash on hand, it’s cost prohibitive to buy gold in any appreciable quantity for investment purposes for most people. You can buy stock in gold mining companies, but then you’re exposed to the risks of both the stock and commodities markets. There is a way that consumers can benefit. Many people have old gold jewelry or other items they no longer use. Perhaps you lost one of a pair of earrings. Perhaps you have a class ring you never wear anymore. Many people have, without realizing it, several ounces of gold in their possession that they can sell. When times are tough, and mortgages are hard to pay, selling gold jewelry can be an easy way to scrape together several hundred dollars to pay the bills.