Be Bold, Buy Gold

By Peter D. Schiff
Guest Columnist

As the price of gold has taken some lumps since it crashed back down through the psychologically significant $1,000-per-ounce mark back in March, those on Wall Street who had consistently underplayed its potential on its way up are now assuring its continued retreat.

According to these gold market spectators, prices have risen solely as a result of financial panic, and now that the fear has apparently subsided, the gold-price gains will evaporate as well.

I have been buying gold and gold stocks for myself - and for my clients - since 1999, and not once did I buy out of fear.  In fact, from my perspective, the only fear I've observed in the gold market is from those who have been too afraid to buy.

Fundamentals vs. the "Fear Factor"

While fear may from time to time play a role in creating price spikes in gold, the underlying bull market has been driven by solid fundamentals. Those who have been too afraid to buy simply do not understand the underlying dynamics and have instead decided that the market is irrational. As a result, gold continues to climb the classic wall of worry as any dip in its otherwise upward trajectory causes the speculative investors to jump ship. And that typically turns out to be a big mistake.

Take Friday's trading action, for example. Gold for August delivery jumped $23.50 an ounce to close at $899 on the New York Mercantile Exchange (NMX) - the yellow metal's strongest close since May 28. That means the price of gold was up 2.7% for the day.

Gold's ascent from less than $300 an ounce to its current level was - and is - being driven by those who prefer the yellow metal as a store of value over the paper alternatives offered by governments [Check out Money Morning's latest report on gold investments, published Friday as part of our ongoing "Cashing in on Commodities" series. The report - "Is Gold Headed for $1,500 an Ounce?" - is free of charge].

As the U.S. Federal Reserve's dollar-debasement policy kicks into high gear - and other central banks around the world are forced to follow suit to maintain their pegs against the dollar - the rational choice for long-term investors is gold. Thus, the decision to buy is not rooted in fear, but rather in reason.  On the other hand, the decision not to buy is not only rooted in fear, but in ignorance, as well.

Jumbo Shrimp ... and Government Accounting

Those oblivious to gold's warnings instead place their trust in government-supplied statistics.  Based simply on flimsy consumer price index (CPI) reports, these observers believe that inflation is nowhere in evidence, and that the flight to gold is therefore unwarranted. 

The government's recent gross domestic product (GDP) report provides the latest illustration of this dynamic.  Federal number-crunches were able to present an annualized, first-quarter growth rate of 0.9% based on an assumed annualized rate of inflation of only 2.6%.  In other words, inflation in the first quarter of 2008 was the lowest for any first quarter in the last four years.  How such a claim did not elicit howls of laughter is beyond me.  The government previously reported that in the years 2007, 2006, and 2005, annualized first quarter inflation rates were 4.2%, 3.4% and 3.9%, respectively.

With global commodities prices climbing steeply, does anyone - besides some of the Fed governors and most Wall Street economists - really believe that inflation so far this year is really 33% below the average rate over the past three years?

Many of those who place their faith with government figures and dismiss the movements in gold believe that inflation is not a problem so long as wages are not rising rapidly.  The fact that U.S. wages aren't rising anywhere near as fast as overall prices here merely means that wages are rising - but just not in America. Wages are rising in the nations that produce the goods that we consume, and those higher costs are indeed being passed on to Americans.

However, recent action in the bond market suggests that a few more people are getting wise to the government's con.  A little over a week ago, yields on long-term Treasuries hit new highs for the year, with the yield on the 10-year treasury up 90 basis points from its March nadir.

While the Pollyannas on Wall Street attribute this move to the strengthening U.S. economy, those of us buying gold know it's more likely a long overdue increase in inflation expectations. 

Got gold?

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[Editor's Note: For a related news story on Friday's record surge in crude-oil prices - including several profit plays to consider - please click here. For a more-detailed analysis of the nation's financial problems, and the inherent dangers that these problems pose for both the U.S. economy and for dollar-denominated investments, download Peter Schiff's new financial-research report: "The Collapsing Dollar: The Powerful Case for Investing in Foreign Securities." That report is free of charge.]

News and Related Story Links:

• Money Morning Financial Commentary:
  That Pain You Feel at the Pump is From a Dollar Crisis, Not an Oil Crisis.

• Euro Pacific Capital Inc. Special Research Report:
  The Collapsing Dollar: The Powerful Case for Investing in Foreign Securities.

• Money Morning Commodities Investing Series:
  Cashing in on Commodities: Will Gold Hit $1,500 an Ounce?

• MarketWatch.com:
  Gold gains over $23 to end the week higher; Prices see biggest rise since Feb. with dollar down, oil up.

• Money Morning Commodities Investing Series:
  Cashing in on Commodities: What's Driving the Oil Bull, How Much Further It Will Go, and How Investors Can Profit.

• Money Morning Special Investment Report:
  Money Morning Boosts Oil Target Price to $225 a Barrel, Thanks to Continued Scarcity, Burgeoning Demand in China.

• Money Morning News: U.S. Economy Expanded Faster than Reported, With First Quarter GDP Revised Upward to 0.9%.