26% and a 10 Year Winning Streak

As we approach the end of 2010, gold has been pulling back in what we view as a healthy correction. At this point, investors need to realize a couple of important facts:

1. Despite the recent correction, the price of gold has risen 26% this year. This means that gold has outperformed stocks, bonds, cash equivalents and real estate. The only asset that we know of that has managed to outperform gold in 2010 has been carefully selected rare gold coins which are, after all, gold investments in their own right.

2. 2010 will be the 10th straight year in which gold has risen in value over the course of the year. No other investment or asset class can match that record. And the important thing about this remarkable winning streak is that the conditions that produced these results remain largely unchanged and, in some cases, they have gotten worse. Here are a few examples:

• Concern over the growing national debt has been one factor that has driven investors toward gold. There can be no doubt that these concerns continue and the debt is getting worse. As this is being written, Congress is on the cusp of passing yet another trillion dollar-plus spending budget, complete with billions of dollars in pork.

• The debt has produced a decline in confidence in the US dollar. More and more signs are appearing every day, in China, in Europe, in oil-rich Middle Eastern nations, that confidence in the dollar is a thing of the past. As the US dollar declines, the value of gold investments in terms of dollars, rises.

• America’s trade deficit is still with us and this too puts downward pressure on the dollar. Despite all the talk, America’s dependence on foreign oil and gas persists and this is the lion’s share of our trade deficit. There is simply no end in sight to this set of circumstances.

• Though many Americans don’t want to think about it, the threat of Jihadist terrorism is still with us. If you look back over the last 10 years in which gold has risen in value annually, the event that touched this streak off was 9/11. Though we have not been successfully hit with a massive attack since 2001, the Jihadist threat is still there, from the Fort Hood massacre, to the Times Square bomber and the Christmas Day Underwear bomber. As an IRA guerilla said a generation ago: we have to be lucky every time, they only have to be lucky once.

• Related to the threat above is the possibility of war in Korea and the looming threat of the Iranian nuclear program. Should either one of these crises come to a head, the result will be a financial catastrophe and investors will need the safe haven of gold for protection.

It is most unfortunate that we need gold, but we can all be thankful that we do have it and that it has been providing us with wealth preservation during each of the past 10 years of economic and geopolitical strife. When those conditions go away, we can all relinquish our gold.


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