Over the course of the centuries coins made of common metals, and currencies of many denominations have come and gone. Over all of these same centuries, in fact over millennia, gold has been universally recognized as a medium of exchange. Does gold have any intrinsic value? Not really. It is very malleable, it has an attractive luster, and it is one of the best non-corrosive conductors of electricity on Earth; but it is, in essence, just another metal. Gold's real value lies in the fact that we have all agreed over thousands of years that it is valuable. Let's face it; if you were on a sinking ship would you rather have a bar of gold or a life raft?
The argument is often made that the value of gold remains the same; it is the value of currency that changes; and hence gold is the perfect hedge against inflation. This is true to a certain extent, but the price of gold is also driven by the same supply and demand dynamic that affects any other commodity. The price of gold in July of 2001 was $265.00 U.S. per ounce. By May of 2006 the price had risen to $720.00 U.S. per ounce. This is an increase of nearly 172%. In the same time period, the overall rate of inflation in the U.S. was about 19%. Common sense tells us that the price of gold is driven by more factors than the value of currency.
Let's look at what other factors might have affected the price of gold in this time period. First, we have the terrorist attack on the World Trade Center. Although this event alone had little effect on the gold market it does seem to mark the beginning of a gradual but steady climb in prices. Following this event we have the war in Afghanistan, worsening relations between Israel and the Palestinians, the war in Iraqi, civil war and genocide in Africa, the rise of the Iraqi insurgency, skyrocketing oil prices, Iran beginning a uranium enrichment program, North Korea developing a nuclear weapon, Israel's invasion of Lebanon, continued involvement in Iraqi in what many believe has become a civil war, and finally the specter of war with Iran and/or Syria. When people are afraid, they turn to gold. In these unsettling times it is no wonder that the price of gold has skyrocketed.
But the question remains, should you be buying gold? Is it a good investment? I would have to answer that in the negative, for now. I feel that the price of gold is artificially over-inflated at this time. If you bought gold when it was below $300.00 U.S., you made a wise investment. Those who are old enough will remember in the late 1970's when everyone was buying gold. It was touted as the perfect investment, and the price rose to over $750.00 U.S. If those investors have held onto their gold for 28 years, they are almost back to the break-even point.
If you have not already bought gold, use your dollars for other things right now. Pay off any outstanding debt, invest in a good food storage program, stockpile vital medical supplies, and look to your home security. If you live in the city, think about buying a rural get-away where you can spend weekends, and buy a good vehicle to get you there. If you have already covered all of these bases, or if you are one of the financially advantaged, then you can start thinking about protecting your money by investing in gold and/or silver.