Investing in Gold is a Move Toward Real Wealth

Oil edged up towards $80 a barrel yesterday. And the latest numbers for producer prices showed more inflation than was expected.

Meanwhile, jobless claims were up. And the Dow rose 86 points…

What do investors see that we don’t? A mirage…the shimmering of hot money…money that comes from the feds. And they can’t believe it’s not real.

But that’s the problem. No one can tell the difference between real money and the counterfeit stuff. Nor can they tell the difference between real prosperity and the phony variety. And who can really know whether the feds are doing some good…or just up to their usual tricks?

Oh my…it’s Friday…and we’re too tired to dig very deeply into these issues. We’re going to keep it simple…even superficial…

Yesterday, gold rose $4. Is it too expensive…or too late… to buy in now?

What we’re looking at is a huge, systemic failure. Instead of ‘keeping it real,’ the financial system has been so phonied up that you can’t tell what’s what.

And then, when prices move…you have to figure out what’s really moving. Is the world spinning? Or just you?

We’ve been following the gold market for years. Gold has gone up about 300% over the last 10 years. But what does that mean? Does it mean gold has gone up? Or that the dollar has gone down?

We raise the question because we’re wondering how to keep score… Richard Russell suggests that you should keep score in ounces of gold, not in dollars. He’s right. Gold is not a perfect way of measuring wealth…it’s just the best way.

Over the long pull of history, gold is more reliable a measure of wealth than just about anything else. Whether you had 100 ounces of gold at the time of Caesar or 100 ounces at the time of Charlemagne…or 100 ounces during the Jimmy Carter years – you were well off.

Note that we said gold is a ‘measure of wealth’ not means to wealth. Gold is inert. Lifeless. Incorruptible. But inherently shiftless. It never gets out of bed in the morning. It has never earned a penny in its entire life.

Gold won’t make you rich. It toils not; neither does it spin. Since it doesn’t hustle, it won’t increase your wealth. That’s why, in the Bible, the slave who kept his master’s wealth safe in gold got beaten. Gold won’t earn a profit. It won’t pay you a salary or give you a company car. All it will do is help keep you from getting poor. We’ve never heard of a man who had 100 ounces of gold who was poor. On the other hand, we’ve read about millions of people with stacks of paper money who couldn’t afford a cup of coffee. In our wallet, for example, is a 10 Trillion Dollar bill from Zimbabwe. A dear reader gave it to us. You could have a stack of those a foot high. You still wouldn’t be able to buy a latte at Starbucks. On the other hand, imagine you had a stack of Krugerrands or maple leafs. Well, you still couldn’t buy a cup of coffee at Starbucks. Because the dumb clerk wouldn’t know what it was. And if he did take the gold coin in exchange for coffee, he’d probably rush over to the mall where some sharp dealer offered to take it off his hands in exchange for PAPER MONEY!

You see, the average person has no idea what real money is. One dollar bill looks the same as another to him. And gold? He’s probably never seen gold, unless it was wrapped around his finger.

Gold is real money. At least, it’s as real as money ever gets. Gold represents wealth. It can be exchanged for wealth. And since the above-ground supply of gold grows about as fast as the economy itself, gold tends to hold its value over centuries. Today, gold is worth about the same as it was worth 2000 years ago.

But you’ve heard us make that point before, haven’t you? Well, the point we’re making today is different. If gold holds its value, more or less, year after year…how can you expect to make any real profit by holding gold? Won’t it hold its value in the future too?

Yes, dear reader, it probably will. As inflation increases, you’ll watch your gold shoot up in price…along with other prices!

BUT…gold is subject to manias and bubbles…just like everything else. Though, it can be expected to hold its value in the long run, in the short run, it could become very over-valued. Why? Because the paper money system is doomed. It is doomed because we can’t tell the difference between a real dollar…and a phony one. And it is doomed because the people in charge of dollars find it more convenient to introduce new counterfeit dollars than to strictly control the quantity and quality of the US currency.

Little by little, average people will come to see gold as a way to protect themselves. Then, suddenly, they will begin talking about gold. Cab drivers will have opinions about which gold coins are the best one to own. Hairstylists will want to convert their savings into gold rings and bracelets. Investors will talk about how much they made by trading in and out of mining stocks.

Gold will soar. Gold’s bubble will have finally arrived. Then, it will be time to sell.

The Daily Reckoning