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The following conversation took place between a
friend's son and I; he's a bright but relatively young investor. He had
purchased some gold based on some things I'd told his father. Shortly afterward,
the price dropped hard. As you'll see, he was not very happy with my advice
and said so in an email to me. So I called him…
I: Sounds like you're upset.
Friend: Yeah, that's putting it mildly. What the hell am I supposed to do
now?
I: Because the gold price has dropped?
Friend: Yes! It's down 15% in a month! I thought you said this was going to
be a good investment.
I: It is. And it will be. You might even consider buying more here if
you have the funds.
Friend: I have some other money, but why would I put it in gold? It's losing
money.
I: Because it's on sale. Because it's cheaper now than when you bought
it. And especially because none of the reasons for buying it have gone away.
Friend: That doesn't mean it's going to go back up.
I: As I told your dad, there are no guarantees, but I think it will have
to go higher. Either way, it will hold its purchasing power over time. We're
holding it as an alternate currency, a more sound form of money that can't be
debased.
Friend: Yeah, well, my money just got debased, big time. It needs to go up
20% for me just to get back to even.
I: Five years from now your dollars will have lost at least 10% of their
value, based just on current trends. There's a good chance it will lose more
than that. And gold will probably rise more than 10% a year. At some point it'’s likely to go into a bubble.
Friend: [silence.]
I: Look, I know you're upset, but I'd hate to see you bail. This is one
of the best investments we can make this decade.
Friend [relenting a little bit]: You really believe that.
I: I can't promise you anything, but yes, I do.
Friend: And that's because you think inflation is coming.
I: It's for a lot of reasons, and that's one of them. Inflation is
virtually baked in the cake; the dollar's long-term problems will be
impractical to resolve; and the global economy is on high alert. This is
exactly the kind of circumstances gold is for.
Friend: Then why is it falling?
I: Institutions need cash and liquidity, and gold offers a bid. Besides,
nothing goes up in a straight line, and gold had just run up 35%. It was time
for a break.
Friend: So this big drop really doesn't worry you.
I: It doesn't. I'm buying. In fact, I'll prove it to you – send me
your gold and I'll buy it from you.
Friend: [Silence.]
I: I know it doesn't feel good right now, and it may take some time for
it to make another new high, but gold is too important not to own here. It's
a long-term trade, so plan on holding it for a while. In fact, if it helps,
just forget about the fact that you own it – go do something fun and
have a beer at the pub.
Friend: [a little chuckle].
I: I don't think you made a mistake buying at the price you did, in
spite of it being lower now. Odds are high you'll be happy in a few years.
Friend: [pause] All right…
I'm glad my son's friend decided to hold on, because
that conversation took place in June, 2006. He'd bought gold at around
$700 and watched a month later as the price fell to as low as $567.
Gold ended up declining a total of 21% in just five
weeks before bottoming, after a run-up of 35% (sound familiar?). And yes, it
took over a year before it hit a new high.
Yet my son's friend – now older and wiser
– wishes he could go back in time and make the same mistake again
and buy gold at $700. His investment is sitting on more than a double, in
spite of buying at a temporary peak.
I think that a few years from now we'll all wish we
could go "back in time" and buy gold at $1,700. And I believe
you'll still feel that way if gold falls to $1,500, as some writers are
projecting.
I think this because circumstances now are worse
– and hence more bullish for gold – than they were in 2006. Look
at how much money we've printed (the monetary base now exceeds $2.6 trillion,
a mind-boggling 200% increase since 2006). Look at the state of the global
economy – highly vulnerable and propped up by governments. Consider the
lingering and inescapable predicament of many European nations – scare
tactics aside, how, exactly, will this be resolved in a healthy way? Ask
yourself if the outlook for the US dollar is out of the woods (roughly 10% of
federal revenue goes solely to debt payments, a figure that is projected to
triple). Explain how the reckless path of deficit spending will shift without
causing some kind of major impact on the economy (history shows abject
deficit spending leads to economic downfall, virtually without exception).
Tell me how we avoid massive inflation, an outcome that seems so certain at
this point that about the only way to avoid it would be a massive global
meltdown – and even then, the Fed would surely print to oblivion.
Like I told my son's friend, nothing is guaranteed.
But until real interest rates are positive again, government leaders
instigate honest solutions to our debts and deficits, the global economy
becomes an engine of growth, the sovereign debt issues in Europe are
genuinely resolved, and global currencies – especially the US dollar
– are strong again, I'm buying gold.
Yes, there will be volatility. And yes, a short-term
"solution" to what seems like certain default in Greece, for
example, would cause some investors to sell gold. But like in the spring of
2006, these are temporary, short-term fixes only. For the tumult that is most
likely ahead, there simply isn't any better currency protection than gold and
silver.
Join me in calling your favorite bullion dealer and
making the mistake of buying gold at $1,700.
[No one
knows with any certainty the future's trajectory… but we at Casey
Research know that contrarian investing will continue to be a profitable
strategy as nations continue to meddle in markets. Get expert ideas on what's
ahead and how to make the most of it – order your When Money Dies Summit audio
recordings today. They're available in CD or MP3 format for
your convenience.]
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