We’ve repeatedly made the case that precious metals, especially gold, are not so much an investment, but a hedge against inflation.
And having an inflation hedge is very important.
It preserves your hard-earned wealth from being nibbled away by yearly price increases ... or from being completely devoured by future runaway inflation.
But there’s a nasty little reality many people don’t talk about: At it’s best, an inflation hedge only keeps you “level.”
In other words, a hedge is more of a wealth preservation tool than an investment vehicle.
A good inflation hedge means that your purchasing power isn’t diminished.
Since most people own an automobile, let’s use gasoline (petrol) as an example.
Gold as a Hedge Against Gasoline Inflation
Let’s wind the clock back to April of 2009.
The world was just recovering from the bottom of the great stock market crash of 2008 (the bottom actually came in March of 2009).
All kinds of bailout money and stimulus funds were flooding the market. All those cash injections made people feel that the worst was over and that life might actually get back to normal.
Here are three key numbers from April of 2009 we are going to use to make our comparison:
1. The average price of gas was $1.95 per gallon in the U.S.
2. Gold was at $890 per ounce.
3. The average hourly salary for U.S. workers was $18.53.
Using these numbers, it would have cost $975 for a year’s worth of gas (using the US government’s estimate of 500 gallons per year for the average American).
That means the average worker had to work 52.6 hours per year just to pay for his yearly gasoline requirements.
However, the price of gas has steadily risen over the last three years.
In fact, the price of gas went from $1.95 per gallon to $3.85 in April 2012. That’s a 97.4% increase! Talk about inflation!
During that same time, the average hourly wage earner has only seen a 6.3% increase in wages.
That means you have to work a lot more to buy the same amount of gas. Here’s the table that shows it:
So, you now have to work 45.1 hours MORE each year to pay for the same amount of gas.
During that same time, the price of gold has risen 85.3%. So gold has actually been a very good hedge for gasoline prices.
Here’s another way to look at it. If you had taken the yearly amount needed for gas in 2009 ($975) and put it in a savings account, you’d now have $1,005 (at 1% interest).
If instead you had used that $975 to buy gold, your gold would now be worth $1,808.
So now your gold would still purchase about a year’s worth of gas. But the cash you kept in your bank account would only buy a half-year supply of gas.
So once again, using gold as an inflation hedge for gasoline has been great over the last 3 years.
But that’s a pretty small sample of time ... and it’s only measuring one commodity.
When we start to look at the bigger picture, we find that....
Gold Is NOT a Great Inflation Hedge
I know that probably sounds crazy coming from us here at EVG. After all, isn’t that exactly what we’ve been saying for the last two years?
Well, yes and no.
As we’ve already shown, gold HAS been a fantastic inflation hedge over the last decade or so.
But if gold were a TRUE inflation hedge, it would always protect against price inflation.
But it hasn’t.
Here’s a case in point.
Back in April of 1987, you could buy an ounce of gold for $440. During the next 17 years, the U.S. experienced a 3.5% annual inflation rate. By 2004, the price of almost everything went up by a lot...
Except gold.
If gold were a true inflation hedge, that ounce you bought in 1987 for should have gone up in price. Instead, it was only worth $405 in April of 2004.
In fact, during those intervening years, your 1987 gold purchase never once kept pace with inflation.
So why do we encourage adding gold to your investment portfolio now?
Because even though gold is a hit-and-miss inflation hedge ...
Gold Is an Awesome “Chaos Hedge”
You see, during times of economic uncertainty, gold acts like a collecting spot for all the wealth being lost elsewhere.
And if economic conditions get more chaotic in the future (we’re sure they will – see below) gold is going to blow the socks off any mere inflation hedge.
Here’s an illustration that might help:
Think of wealth like cups of water lined up on a counter top.
One cup is labeled “Stocks.”
Another is labeled “Treasury bonds.”
There’s also a “Municipal bond” cup, a “Corporate bond” cup, and a “Real Estate” cup.
They all are filled with varying amounts of water.
During times of economic stability, each cup would be about equally filled up to the halfway point.
But as economic cycles shift, the water changes cups.
Certain conditions cause investors to transfer wealth from the “Bond” cups to the “Real Estate” cup.
Other economic factors might cause people to sell their “Real Estate” and pour the proceeds into the “Stock Market” cup.
And so on.
When an economy is healthy and stable, the amount of wealth in the cups remains fairly well balanced.
But as economic conditions change, one cup gets filled too high, spills over, and causes a big mess.
That’s what happened in 2007 when the housing cup got too full. Then in 2008, the stock market cup overflowed.
A lot of that wealth overflow spilled into a cup labeled “Gold” ... which is why the price of gold has gone up so much since 2007.
Gold has simply been “collecting” much of the wealth lost in those two bubbles that burst.
But believe it or not, the gold cup is still only partially filled. And other, big bubbles are getting ready to burst.
How Full is the Gold Asset “Cup?”
Some experts say the gold cup is a quarter full. Others say even less than that.
Any way you look at it, gold is NOT the bubble that’s ready to burst now. (It will, in the future. More on that below.)
But, many people are still “afraid” of gold...or ignorant of its wealth-collecting properties. They think the cup has already reached its limit.
But during times of economic uncertainty, when no one is confident that ANY of the cups are a safe place to store their wealth, people start selling off assets and pouring that wealth into the cup labeled “Gold.”
This happened once in recent history, back in the late 1970s and into the early 1980s. Gold became so popular that everyone wanted it. Lines at coin shops snaked around corners for blocks and blocks.
Every janitor, school teacher and garbage collector wanted gold. People who knew nothing about gold were trying to buy as much as they could afford.
We aren’t anywhere near that level of gold “awareness.” In fact, despite all the publicity gold has received, the majority of people still do not own gold, and have no plans to.
But they will.
Just like in 1981. It will happen sometime in the near future ... when every other asset is considered “untouchable.”
That day is still off in the future. But it’s coming.
There are still sound reasons why the price of gold has shot up over the past four years ... and why it should continue to rise for the foreseeable future.
It’s not any ONE thing. It’s a collection of economic conditions and government reactions like:
• Soaring sovereign debt in Europe, the U.S. and throughout the world.
• Rampant deficit spending that continues to push the national debt higher rather than lower
• Unsustainable growth projections Wall Street has imagined
• Mounting student debt and consumer debt,
• Stagnant home prices,
• High unemployment,
• High (but sneaky) inflation,
• Negative yields on treasuries,
• Excessive money printing
This is NOT stability. Frankly, our economy is on the brink of chaos (and remember, gold is an AWESOME chaos hedge).
Eventually one of the above problems will hit critical mass and start a domino effect of financial crisis.
Like 2008. Only worse.
Then true chaos will hit. People will panic, and they’ll start to empty all their cups – stocks, bonds, whatever.
And not finding any other safe place, they’ll likely dump it much of it into the one remaining safe haven – the “Gold” cup.
That’s when gold will be king.
Eventually, the “Gold” cup, too, will reach the top and start spilling over.
When that happens, it will be time to sell your gold. The great wealth transfer will have commenced. At EVG, we’ll let you know exactly when we’re there and when we’re selling.
In the meantime, understand that we aren’t even close to that point yet. Gold has a long way to go.
Creating Your Own Chaos Hedge Now
As we’ve mentioned before, we don’t try to “time” our gold purchases perfectly.
If you are able, buying a set amount of gold each month is a great way to create your chaos hedge without getting emotional about the price.
And if you haven’t started yet, now is likely a great time to get in before gold rockets higher.
But before you make the plunge into gold, get educated. There are good types of gold to buy and bad types. (And you don’t want to get caught with the “fools” gold when chaos hits. It won’t help).
No worries...
Your EVG membership site has two complete (and very thorough) modules on buying and selling gold you won’t find anywhere else.
The most recent update from Mike Maloney (2012 Precious Metals Update With Michael Maloney…) also talks about the looming Wealth Transfer.
Another great review is How To Profit From Hyperinflation – An Exclusive Webinar With Gonzalo Lira
In short, you’ll learn all the ins-and-outs of how to buy at the best price, in the proper form, where to store it, and how to maximize your tax advantage when selling your gold.
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