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Why the Gold Price Doesn't Matter

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Unlike 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!

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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 shone over the past decade.

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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.

DOW-JONES-GOLD
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*Gold divided by DJIA

S-P-GOLD
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*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.

NEW-HOME-SALES-GOLD
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Tarek Saab is an entrepreneur, speaker, and nationally syndicated author. He is the founder of Saab & Company Inc., which owned the online bullion business, Guardian Commodities, before it was acquired by Trusted Bullion in August 2010. An avid (more...)
 
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