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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 metals.

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 U.S. dollar.

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.

 



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