Why Should Public Care About Gold's Price?
By Patrick A. Heller
Last week, while I was taping a radio interview
about precious metals, the host asked a very
perceptive question. Simply, he wanted to know
why the general public should care about the
price of gold.
Everyone cares about the price of gasoline,
food, health care, housing and utilities and the
like because they typically pay for such goods
and services on a regular basis. If prices
change, even if only by a small amount, it has a
noticeable effect on their lifestyle.
To most people, the price of gold may not seem
important as they are not regularly in the
market to buy or sell gold or other precious
However, the price of gold and the trend of its
price changes are far more important than many
in the general public realize. The value of gold
itself is not important, because an ounce of
pure gold today will still be worth an ounce of
pure gold a year from now. What is important is
the ratio of the value of the local currency
compared to gold.
In the United States, the general public is used
to thinking of prices in terms of U.S. dollars.
If prices in dollar terms remain stable,
Americans do not perceive any impact on their
financial net worth. For example, early this
decade, a U.S. dollar was worth about .004 of an
ounce of gold. Today a U.S. dollar is only worth
about .001 of an ounce of gold.
If you were to ask most Americans if they feel
75 percent poorer than they did at the start of
this decade, most would say no - because U.S.
dollar prices have not changed by that much.
Yes, a lot of Americans might say they are
poorer because the value of their stocks and
bonds has fallen and their homestead isn't worth
as much as it was a few years ago. But few would
feel 75 percent poorer and even fewer would
attribute the decline in their net worth to the
falling value of the U.S. dollar to gold.
This example proves the value of paying
attention to the price of gold. The fall in the
value of the U.S. dollar versus gold
foreshadowed the fall in value of U.S.
dollar-denominated paper assets - like stocks
and bonds - and the risk of falling values for
illiquid tangible assets - like real estate.
I did an analysis two weeks ago. From Dec. 31,
2001, through Aug. 25, 2009, all six of these
stock indices had declined: Dow Jones Industrial
Average, S&P 500, NASDAQ, Nikkei 225, London
FTSE 100 and Frankfurt Xetra DAX, with declines
ranging from 0.4 percent to 10.5 percent. In the
same time period, the Russell 2000 index was up
19.4 percent. These results are blown away by
gold (up 238.5 percent), silver (212.5 percent
higher), and platinum (a 154.2 percent
increase). Palladium, a precious metal that is
not a financial metal, was down 34.5 percent
during the same period.
The price of gold does matter to the general
public because the reasons for its strength this
decade are also the same reasons why their paper
and illiquid tangible investments have generally
performed so poorly. Had the general public been
following the gold price and understood the
reasons why it was rising against the U.S.
dollar (or more accurately, why the US dollar
was falling in value against gold), they would
have been better prepared to reallocate their
portfolios to preserve their wealth.
When the currency crisis hit the Far East in
1997, Indonesian citizens who held gold saw
their lifestyle little changed. The citizens who
did not own gold saw their wealth destroyed. In
this decade, most Americans have suffered
greater losses in their net worth than they yet
realize because they did not own gold and were
not following the price of gold. In the next
year or so, there is a possibility that what hit
Indonesia's currency in 1997 could happen to the
So far this decade, the easy profits with gold
and silver have been made, but I think the
biggest profits are yet to come. It isn't
possible anymore to convert your U.S. dollars
into .004 of an ounce of gold. But it isn't too
late to get .001 of an ounce of gold for each
dollar. By buying gold today, you can still
protect yourself against a future where a U.S.
dollar many only buy .0001 of an ounce of gold.
It has happened in countries around the world.
It could happen here.