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Why the Gold Price Doesn't Matter

Commodities / Gold and Silver 2010 Apr 20, 2010 - 05:51 AM GMT

By: Tarek_Saab

Commodities

Best Financial Markets Analysis ArticleUnlike mining stocks, gold is not an investment. Gold is money. It is a store of wealth. Gold's 5x growth this past decade is significant not because it's nominal price has increased, but because the prices of most other assets have increased less.

The gold price simply doesn't matter. Gold's value as measured in a fiat currency is arbitrary. Sure, adept traders can take advantage of short term price fluctuations, but bullion owners invest for the long term, and they do so to protect their wealth.


Some are calling for $5,000 (or even $10,000) gold. It might happen. Who knows? But if all other assets grow at the same rate, the sum gain is zero. Gold growth in dollar terms does not guarantee increased wealth.

On the contrary, it is wholly conceivable that the gold price could fall and you could make a fortune! If gold settles at $1,000/oz, but the DJIA, S&P, home prices, car prices, etc, all fall at a greater rate, your net gain is the difference to the downside. In other words, your net purchasing power would increase!

Purchasing Power

The real statistic worth measuring is purchasing power.

The graphs below depict what I mean. Gold's real value is determined not in the price of a fiat currency, but as a ratio to other assets, and this is where gold has really shined over the past decade.

During the "lost" decade, in which the Dow and the S&P 500 flatlined, gold's performance became all the more significant for owners who had the foresight to hedge against a deadening economy.

*Gold divided by DJIA


*Gold divided by S&P 500


Despite the incredible housing bubble in the middle part of the decade, gold consistently rose against home values. In 2000, it took 705 ounces of gold to buy the same house you can purchase today for just 253 ounces.

*Reference for average new home prices here (24k pdf)


Are food prices rising? You bet. But not as much as gold, according to the Bureau of Labor Statistics.

*(Bureau of Labor Statistics, US City national average composite of prices: Pasta, Flour, Bread, Ground Beef, Turkey, Milk, Butter, Cheddar Cheese, Apples, Bananas, Potatoes, Lettuce, Broccoli, Sugar)



In 2001, it took 95 ounces of gold to buy the same car you can purchase today for just 25.5 ounces, according to the National Automobile Dealers Association.

*Source National Automobile Dealers Association, www.nada.org


Sure, for gold bulls it can be an obsession waking up every morning to check the Kitco spot price. But in the long term, the move to gold holds far more significance than a ten or twenty-dollar price swing. If you can keep your head (and shirt) when all about you are losing theirs, that in itself will be a great triumph.

History will record our age as the time of the greatest economic meltdown the world has ever known. In the end, it won't matter if gold is selling for a trillion dollars or fifty dollars. What will matter is what you can buy with it.

'Til next time, that's my Saab Story.

By Tarek Saab

www.guardiancommodities.com

Tarek Saab is a former finalist on NBC's "The Apprentice" with Donald Trump. He is an international speaker, syndicated author, entrepreneur, and the President of Guardian Commodities. His website is www.guardiancommodities.com

© 2010 Copyright Tarek Saab - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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