Gold has been on a “tear” for a decade. The price of gold has literally risen in each of the past 10 years. This has resulted in gold outperforming most other investment categories during this period of time.
Despite this excellent long-term momentum many investors have taken to sitting on the sidelines, rather than buy gold investments because they fear that gold may “have had its day.” Some observers even claim that gold is a “bubble,” getting ready to burst.
The available evidence suggests that gold is still vital to a properly diversified investment portfolio because (i) the macroeconomic and geopolitical environment is still conducive to higher gold prices going forward and (ii) in real terms, the price of gold isn’t all that high.
The Macroeconomic and Geopolitical Environment
Before assuming that gold has finished its run, investors should ask themselves, “What has changed in the macroeconomic and geopolitical environment to keep the price of gold down over the long-term going forward?”
The answer of course is the macroeconomic/geopolitical environment is actually supportive of higher gold prices over the long-term. For evidence, one need go no further than America’s national debt and ongoing federal budget deficits.
The national debt continues to grow, it is now well over $15 trillion. Meanwhile, the federal government keeps spending and is running an annual deficit of some $1 trillion, an amount that essentially gets added to the national debt each year.
This situation ensures that the US dollar will continue its long-term decline and likely means that the US will have no choice but to turn to a hyperinflationary monetary policy at some point down the road. Why? Because that debt must be repaid and the only way the US Treasury will be able to live up to its obligations is by paying back creditors, such as China, with dollars cheapened by inflation.
In other words, it is inevitable that the Federal Reserve will fire up the printing presses like never before to pay off the debt.
This is the reality that overrides all other factors in the economy and the political realm and it is one for which investors must be prepared. Gold investments are uniquely qualified to protect wealth from the ravages of the high inflation that will eventually come.
But is the price of gold really that high?
As we sit down to write this article, the price of gold is trading at $1,550 per ounce. This is NOT lofty by any measure.
Consider that the all-time high for gold was over $1,920 per ounce. That means that just to get to its previous high, gold would have to rise by nearly $400 per ounce. That is hardly an overvalued investment. Also, consider that in real terms, compared to other financial assets, such as the stock market, the price of gold is still very low.
In 1980, the price of gold reached around $800 per ounce. In the same year, the Dow Jones Industrial Average peaked at around 1,000.
Consider today that gold is less than twice the level that it was in 1980, yet the Dow is trading at over 12,000, a dozen times the level of 1980. Despite this, gold has actually outperformed stocks over the past 10 years, yet gold still seems undervalued compared to the stock market.