Guaranteed Safe Investment
One of the great fears gold bugs have is inflation. Gold isn't an investment, it's a store of wealth - a hedge against inflation.
The U.S. Treasury saw this issue years ago and created the I-Bond in 1998. It actually paid you interest + inflation. PURE GENIUS! You could buy bonds, earn interest, be adjusted for inflation and NOT have to worry if a giant gold vein was found in Antartica!
On Jan 1, 1998 gold was trading at $285/oz. By Jan 1, 1999 gold was at $287 and by 1/1/2000 it hit a whopping $282. Gold was beaten! The I-Bond had proven that investors who just wanted to store wealth had a weapon beyond gold.
Here is a table of prices below:
Gold/Gas/Flour/Fed Rate prices in table below are all from January of the year.
YEAR Price Gold Inflation Gasoline Flour FED Rate
1998 $285 1.48% $1.19 29¢ 5.56%
1999 $287 2.62% $1.08 29¢ 4.63%
2000 $282 3.43% $1.39 28¢ 5.45%
2001 $271 2.63% $1.51 30¢ 5.98%
2002 $278 1.51% $1.19 32¢ 1.73%
2003 $344 2.31% $1.41 32¢ 1.24%
2004 $416 2.52% $1.64 31¢ 1.00%
2005 $428 4.64% $1.76 33¢ 2.28%
2006 $530 2.05% $2.17 33¢ 4.29%
2007 $640 2.74% $2.55 35¢ 5.25%
2008 $840 4.88% $3.00 42¢ 3.94%
2009 $870 (-1.25)% $1.88 51¢ 0.15%
2010 $1120 1.54%* $2.76 49¢ 0.11%
Gold's value has increased by 392%.
Gasoline has increased by 131%.
Flour is up 69%.
During this time period (1998-2010), according to the U.S. Treasury, inflation increased by 35% (in other words, $1 is now worth 65¢.
But anyone can plainly see $1 in 1998 is NOT worth 65¢ twelve years later.. Maybe, just maybe you can argue $1 is worth 45¢. The I-Bond has failed to keep up with the cost of real inflation and is a failed instrument, because the gov't continues to fudge inflation data.
So what's the point of all this? Notice the year 2003 very carefully. Gold spiked around 50%, inflation (according to the U.S. Treasury) was a tame 2.31%, gas was still the same price as in 2000 and flour prices were the same from the year before. But gold continued it's march in 2004 and beyond, gasoline and flour began to move up quickly, but no where near as fast as gold.
Now look at that FED Rate more carefully and you'll see Gold is NOT a leading indicator of inflation, but rather it is telling you about the amount of fiat dollars in circulation.
The I-Bond began to fail investors as the people in charge of the instruments fudged data. This is the beauty of gold - you can't make it, you can't fudge it. Either you have it or you don't.
Long-term, if your interest is to PRESERVE WEALTH, nothing beats gold. Even if you bought gold in 1980 at $1,000/oz, you didn't lose any wealth when it dropped to $400/oz because the dollar got so strong. The same goes for when gold rises - you aren't GAINING ANYTHING! You are merely storing wealth.
But wait! If "real" inflation isn't moving up as fast as gold, aren't you making money. The answer is yes/no. There will always be daily/weekly/annual price moves due to supply and demand, but they will even out over time. The other important fact to remember is inflation can double without prices moving up at all. What the #%$##! Think about this hypothetical scenario - you invent a technique that lowers the cost of ALL production by 1/2. The gov't instantly doubles the money in circulation and prices stay the same. Inflation is 0%, but gold will double, because inflation in prices is not the same thing as money in circulation.
In fact, I consider the above situation the greatest negative effect of our Federal Reserve. We've had 40 years without a gold standard. 40 years of better technology driving costs down, yet prices continue to rise. So basing the value of a dollar on prices is pure nonsense - the dollars value can only be based on a fixed commodity like gold.
So beware of anyone selling gold as an investment. It is not that type of instrument.
*Doubled semiannual rate since Nov data not yet released
Gov't Inflation Rate: http://www.treasurydirect.gov/indiv/research/indepth/ibonds/res_ibonds_iratesandterms.htm
Gold Prices: http://www.kitco.com/scripts/hist_charts/monthly_graphs.plx
Gasoline Prices: http://www.oregon.gov/ODOT/CS/FS/gas_prices.shtml
Flour prices: http://data.bls.gov:8080/PDQ/servlet/SurveyOutputServlet;jsessionid=62305ee1f47d67430594
FED Rates: http://www.federalreserve.gov/releases/h15/data/Monthly/H15_FF_O.txt