Investing in Gold

Investing in Gold

investing in gold

End of June 2020 and the western world is trying to recover from the covid-19 lockdown. How much is the damage caused by the coronavirus and how this economic shutdown will affect the markets remains to be seen. Is there going to be a quick recovery, or there will be a recession? Where should I invest my savings now? Investing in gold now in July 2020 could be a good move.

Stock Market is Inflated

When the market crashes you get a W move. Very rarely you will get a V move and yet, if we look at the economic numbers, they are catastrophic, but we are back to all-time highs. There has to be a reason for that and there is.

The central banks, Fed, ECB, and Asian banks have been pumping vast amounts of credit into the economy. That is what is pushing up equities. The market is telling us these market highs are due to a large amount of inflation, caused by liquidity the central banks have created. It is not the market rising, it is the value of money forming.

50% Inflation for the Next 5 Years

investing in gold

The only reason stocks are so high is because inflation is coming. If inflation is on the way, where do you put your money? Many investors and financial experts say gold and rightly so. Most investors are small, they do not own large amounts of credit. However, billionaires, fund managers, and so on only have one place to put their money to get away from inflation and that place is equities.

We are seen equities so high because the central banks have baked in a 50% or maybe 100% rise in inflation over the next four to five years. In other words, the big money is trying to protect themselves from that inflation by going into equities which by definition will rise from inflation.

If you believe there will be deflation, all you have to do is to hold on to your cash. If you think inflation is on the way, cash is not useful because it will lose value. The Fed believes there is a strong possibility for a 50% to 100% increase in inflation over the next three to four years. That is a huge number and it will affect everyone. For example, if you are planning to take a holiday to an exotic location with your retirement fund, you will not be able to afford it. You will probably take a holiday to a cheap resort nearby. In a few words, your purchasing power will drop substantially.

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Business Collapse and Unemployment

Investing in Gold

Market bulls argue the market is already recovering. Shops are opening, factories are back in business, restaurants are opening too, stocks are holding up, and so on.

They are totally wrong. Unfortunately, unemployment levels are massive and still growing. Several airlines already declared bankruptcy. Some of them are Avianca from Colombia, Virgin Australia, Trans States airlines from the US, Compass airlines also from the US, and many others. Rolls Royce announced 9000 job losses in the UK, Nissan shuts down its Barcelona plant in Spain with 3000 redundancies, and another 25000 jobs were indirectly threatened.

In the US the news is not good either. The country has lost 20,6 million jobs since mid-March, resulting in an unemployment rate of 14,7% a level not seen since the great depression in the 1930s. I am afraid, there will be more business collapse and more unemployed in the following months.

The recession is going to be bigger than the 2008 recession. It will take years for the world economy to recover not months or weeks. The numbers are already massive and still growing. As I just said, the economy is not going to be back to where it was within a year that’s for sure. So why is the stock market still high? What is that’s still driving equity prices? It is the Fed’s liquidity.

Everyone is Printing Massive Amounts of Money

investing in gold

The Fed and its proxies are doing it one way or the other. They are squeezing people out of the bond market indirectly, by enabling certain parties to buy equities, support the market, and support liquidity.

It is important to support equity prices because that supports employment, supports the middle class and it also supports the rich. In addition, it is also important to support the property market because it supports the middle class.

If you let stocks, bonds, and property go down you will have an economic collapse. Anyhow, we already have economic collapse and this is called unemployment. The Fed and the government are propping up the rest of the economy by printing money, which is exactly what governments did for hundreds of years, to deal with similar issues. Pumping money into the economy and in the end creating inflation. In fact, inflation has always been the end result.

Inflation isn’t going to be a US economic issue. It will be a world economic issue as the rest of the world is also printing and pumping money into their economies. For example, the Europeans have decided to pump almost 3 trillion euros to aid their economies.

Covid-19 is Coming Back

I am afraid our covid-19 struggle isn’t over yet. There is already the second wave in the US and the markets are already distressed. From 18,000 infections a day a week ago, we are now to a record 40,000 infections a day. That will add more strain to the weak economy, as there will be an extension to lock down in many states across America.

Nonetheless, there is not going to be a second lockdown, not in the States and not in the rest of the world. The reason for that is that nobody can afford it. A second lockdown will take us back to the stone age. Western democracy cannot operate with lockdowns, as lockdowns diminish tax revenue. The state cannot support its social policies. (welfare, education, public housing, health, and so on.)

Support the Real Economy

Investing in Gold

Every time countries cannot raise tax money, they print it and that leads to inflation. The Fed will argue that a 50% inflation over 5 years is nothing to the economic meltdown that was coming and that is partially correct.

I would argue that the Fed shouldn’t be throwing billions of dollars into stocks. Last week the Fed injected over $60 billion into the markets. That is a massive amount of money to spend in a week’s time. There will be a time when easy money for equities will not be around and then equities will take a dramatic downturn. Supporting the stocks is vital, but only up to a point. What is more important is to support the real economy out there. The real economy is real jobs, real growth, and prosperity for everyone.

The Fed will continue to print money throughout the year and this will continue for 2021. The Fed also will not raise interest rates for the next couple of years as their quantitative easing policy is well on track.

Gold Offers Stability and Growth

Volatility is the new reality for the market. At this time gold and silver can offer, stability, protection, and growth. Gold has always had a strong second half of the year. We’ve seen it over and over again for gold, to finish the year with a good rise. The yellow metal is expected to move higher. It is already building nicely at the moment but I do not expect gold to get over the $2000 mark this year. Gold is expected to do well in 2021 as well. Beware though, usually gold is weak before any elections, we might see gold slowing down in Autumn.

Geopolitical tensions always give gold a boost. The Chinese Indian border clashes, the North Koreans are back and Turkish ambitions in the Mediterranean sea could drive gold’s price further. I would also like to mention silver. At the moment I consider silver a good investment.

Moreover, I would like to mention bitcoin. For me, bitcoin is digital gold. You can buy it fast and sell it fast and you can have it in cold storage virtually in your basement.

Final Words

Credit expansion and monetary stimulus are driving the market into new highs even though, we are in the middle of a covid -19 caused recession. We are seeing the stock market not follow the economic downturn. The market is now addicted to never-ending credit, is asking for more and getting it. Inflation is coming, we expect at least 50% inflation for the next 4 to 5 years. But, there will be a time when easy money runs out and then, things could get ugly.

A prudent down-to-earth investor always has a percentage of his portfolio invested in gold to protect his savings from inflation, economic crisis geopolitical tensions, and so on. In these uncertain times, gold is a good bet to safeguard your life savings from the economic recession.

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Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

Money periodically lost its value and became cheaper hundreds and thousands of times. This happened in many countries, across different continents. I have compiled the most revealing examples of devaluation of national currencies over five decades.

1967-1968. A crisis in Peru

Peru’s state budget was seriously depleted during the second half of the 1960s. The country’s gold reserve experienced a threefold decrease. Sharp inflation plunged the country into a crisis. Following the military coup, the incumbent president of the state was dismissed and replaced by another one. The Cabinet of Ministers changed four times over six months. However, it was impossible to overcome the crisis in the country.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

In the photo: A mass demonstration in Peru. Citizens of Lima took to the streets to express dissatisfaction with the policy of the authorities.

The prices of products and basic necessities increased, the number of poor and unemployed in the country grew by 22%. Due to inflation, the devaluation of the Peruvian sol was 45%.

CONCLUSION: Against the backdrop of economic problems and the fall of the national currency, the price of the precious yellow metal has risen. The average price of a troy ounce of gold in 1967 was $35, and in 1968 — $ 38.

1970-1971. The decline in the quality of life in Argentina

In the 70s, Argentina was hit by the financial crisis. The price level doubled every two to three months. The government decided to save the situation and introduced a new national currency. The old peso was exchanged for a new “legal peso” at the rate of 100:1.

The crisis in the economy was accompanied by all the classic symptoms of the Lack of Financial Security virus: unemployment, a decline of living standards and strikes.

CONCLUSION: The old peso savings of Argentine residents have been decreased many times. The economic crisis affected the price of the precious yellow metal: in 1971, the price of gold increased to $43 per troy ounce.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

In the photo: participants of the street rally in Córdoba, Argentina.

1975 year. The military coup in Chile

Since the early 70’s, the government of Chile printed a huge amount of paper money – escudo, to plug the gap in the country’s budget. Besides that, the government decided to take food prices under control. Strict measures had a negative impact on the economy. There was a shortage of food products. Prices have multiplied. In just 2 years, inflation increased sharply from 22% to 353%. Prices for copper decreased, the devaluation of the dollar impacted the national currency. Strikes and mass demonstrations have become more frequent. In 1973, the military coup happened in Chile.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

In the photo: In 1975, after 15 years of using the escudo currency, Chile issued a new currency – peso.

One could exchange 5000 escudos for 5 new pesos.

As a result of the anti-crisis measures of the military government, inflation began to decline.

CONCLUSION: At a time when the national currency of Chile depreciated, gold became more expensive. In 1975, the price of gold was $139 per troy ounce.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

On the chart: changes of the price of gold per troy ounce, starting from 1975 to 1979.

1979-1980. The collapse of the national currency in Israel and Vietnam

Inflation in Vietnam began to increase since 1975. Money began to depreciate. The Government of the Socialist Republic banned the free sale of gold, therefore, the “black market” of gold was on the rise in the country.

The state of the united Vietnam abolished the monetary unit of dong. The replacement of the old dong with the new one was made at a rate of 500:1. The exchange limit of 100,000 was set for each family. By the end of the 1970s, hyperinflation in the country had reached three-figure numbers.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

In the photo: 500 old dongs of South Vietnam and 100 new dongs of the Vietnam in the 1980s.

Israel also experienced difficult times. The authorities tried to improve the situation and restore trust in the national currency. In a short time, three heads of state were replaced. In 1979, for the first time in the history of the country, inflation exceeded 110%.

In 1980, instead of a depreciating lira, a new monetary unit was introduced — shekel.

CONCLUSION: Due to the difficult economic situation in the world, the demand for gold sharply increased. In 1980, the price of the precious yellow metal reached $706 per troy ounce. The average price per year was $594.

1998. The fall of the Russian ruble

Since 1993, Russia was hit by inflation, which was followed by a default in 1998. Over 5 years, the price of some products and services increased by 100% or even more. The prices were in millions of rubles. Banks stopped giving cash to depositors. The market was empty. The workers received their salary in the form of food.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

In the photo: the queue of the Russian depositors to the bank, August 1998.

CONCLUSION: Many people who had money on bank accounts lost their savings. Against the backdrop of instability in the world, the price of the precious yellow metal has increased. In 1997-1998, the average price of gold per troy ounce increased to $291.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

On the chart: changes of the price of gold per troy ounce, starting from 1968 to 2000.

2001. Devaluation in Belarus, Ecuador and Turkey

Inflation in Belarus has progressed from the mid-nineties to the early 2000s. The Belarusian ruble has fallen in price so much that the government had to introduce a new national currency. Old Belarusian rubles were replaced by new ones at the rate of 2000: 1.

In 1998, following the decrease of oil prices, Ecuador was hit by the financial crisis. The government of the country declared a default on external debts. The Ecuadorian sucre depreciated 4 times. 70% of the population were below the poverty line. This caused a storm of protests and unrest.

The government tried to fix the situation and pegged the sucre to the US dollar at a rate of 25,000: 1. But such measures did not help. Since 2000, the state has finally transferred the country’s financial system to the US currency. Since 2001, Ecuador has no national currency.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

In the photo: The purchase of US dollars from an “illegal dealer” in Quito, Ecuador.

Turkey experienced severe inflation throughout the 90s. From 1995 to 2000, the lira depreciated 20 times. In 2005, the government introduced a new monetary unit. The exchange rate of the new Turkish lira for the old one is 1 000 000: 1.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

In the photo: The denomination of 20 million Turkish lira was exchanged for 20 new liras.

CONCLUSION: The above listed examples illustrate the depreciation of paper money. Against the backdrop of inflation, gold rises in price. In 2001, the price of the yellow metal was $276 per troy ounce, in 2005 — $513.

2008-2009. Hyperinflation in Zimbabwe

During the mid-2000’s, the financial crisis in this South African country reached alarming proportions. This happened as a result of the state land property redistribution. Prices doubled every half hour.

The Zimbabwean dollar was cheaper than the paper on which it was printed. In 2009, the authorities ceased to issue their own currency and began to use the monetary units of neighbouring countries.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

In the photo: A citizen of Zimbabwe exchanges a trolley full of banknotes for 1 US dollar.

CONCLUSION: Inflation in Zimbabwe has deprived the population of savings kept in the national currency. Gold continued to grow. In 2008, the annual average price of a troy ounce was $869, and in 2009 — the precious metal was worth $1087 per ounce.

2018 year. Paper money has been losing ground

The depreciation process of national currencies in some countries of South and Central America, Eastern Europe and Asia continues. The devaluation of the Bolivar occurred in Venezuela. Iranian rial fell in price. The Russian ruble survived the downfall, and the Turkish lira became cheaper.

Meanwhile, the price of the troy ounce of gold remained high – $ 1,192.

Dynamics of Gold Over 50 Years-From $35 to $1200 per troy ounce

On the chart: price change (in US dollars) per troy ounce of gold, starting from 1968 to 2018.

It should be noted that during a short interval the precious yellow metal could slightly decrease in price. But this wasn’t so dramatic and not as traumatic as the devaluation of the paper currency.

Gold has demonstrated a significant price increase over 50 years.

In times of political and economic crises, owners, as a rule, lost their savings kept in paper money. Gold, on the contrary, was in demand and rose in price.

The precious yellow metal remains stable at all times. It serves as a protection tool for people and their savings over hundreds of years. Gold does not depreciate as opposed to money.

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