Gold: The most glamorous commodity
Finally, after 28 years,
gold hit a record of $858 an ounce,
besting its previous high of $850 way
back in January 1980.
I well remember those days of heady
double-digit inflation when the dollar
was crashing, silver was at $50 an
ounce, and gold was hitting new highs
every day. Howard Ruff's book, "How to
Prosper During the Coming Bad Years" and
Doug Casey's "Crisis Investing" were
bestsellers, and people at church were
coming up to me and asking how much
"junk" silver they should buy.
But $850 gold and $50 silver turned out
to be the top � a good time to sell, not
buy. The year 1980 was a "tipping
point," when Ronald Reagan was elected
president and Paul Volcker, his Fed
chief, imposed tight money and high
interest rates to kill the inflationary
psychology. It worked, and commodities
fell sharply, even as traditional stock
and bond markets came back to life.
Is 2008 another tipping point in
financial history? The Midas Metal has
been on a tear since the war on terror
erupted in 2001. Above all, remember
that war is inflationary, and the
central banks have been busy printing a
lot of new dollars, euros and yen since
2001 -- and since 1980.
It was clearly catch-up time for
commodities in general, and for precious
metals in particular.
Three Vital Lessons About Gold
1. First, gold has tripled in price,
from $270 an ounce to over $850. Still,
it may have further to go.
In real terms, given the massive
devaluation of the dollar since 1980,
gold is relatively cheap. It's not the
bargain it once was, but it could move
Jim Rogers has made a historical study
of commodities and found that the
typical cycle lasts 15-20 years. That
means we could be in for another decade
of higher commodity and gold prices.
Much depends on the dollar and monetary
policy. If the Federal Reserve maintains
a tight money policy (M2 growth has
slowed significantly in the past six
months), the dollar could rally in 2008
and make it more difficult for gold to
move higher. It could even decline in
2. Gold is the ultimate inflation hedge.
In the latest (4th edition) of Jeremy
Siegel's classic book, "Stocks for the
Long Run," the Wizard of Wharton notes,
"the price of gold closely follows the
trend of overall inflation over the past
two centuries. Its price soared to $850
per ounce in January 1980, following the
rapid inflation of the preceding decade.
When inflation was brought under
control, its price fell."
For gold to perform well, the inflation
rate has to continue rising, as it has
been since 2001. If the inflation rate
falls, gold will fall.
3. Gold is a good "non-correlated"
investment, as Dick Davis points out in
his new book, "The Dick Davis Dividend"
(highly recommended). Gold actually rose
when the stock market went into a severe
bear market in 2000-03. It has continued
to outperform the stock indexes since
In the past couple of days, while stocks
have floundered, gold and gold stocks
In short, gold serves as an excellent
non-correlated investment in your
portfolio. David Swenson, the highly
successful manager of the Yale Endowment
Fund, has emphasized the importance of
having "non-correlated" investments in
your portfolio, including energy stocks,
real estate, foreign investments, and
Because of "non-correlated" investments,
his Yale Endowment Fund has consistently
beaten the market over the past 20
years, and even rose during the 2000-03
bear market. (The Oxford Club's Asset
Allocation Model is designed to do the
same thing, and has helped the Club's
portfolios beat the S&P nearly 3-to-1
for fives years running.)
The Midas Metal should be an important
part of anyone's portfolio, anywhere
from 5 per cent-15 per cent. Just
remember, gold is a good long-term
inflation hedge, but in the short run,
the yellow metal can be volatile.
Mark Skousen is Advisory Panelist,