Gold and What to Do With It

For a more or less elementary analysis on whether to invest in gold, I would say there are two broad considerations to be had:

1) Gold prices have multiplied within the past ten years, but the demand has especially grown since '08, and this is understandable, given the Fed's wickedly accommodative policies to "prevent a meltdown," and the general uncertainty/lack of confidence in the dollar that goes with the U.S. recession. I cannot help but be reminded of housing prices, and how they at one time multiplied year over year, too. I'm not making any direct comparisons, but I am versed in bubble economics to some degree. All I'm saying is that the stuff might not hit the fan as many people believe it will, leaving a lot of investors with surplus gold on their hands. With Bernanke's reappointment, and with seemingly everything that this administration does almost blowing up in its face (the precipitous drop in approval ratings hasn't been seen since the '60s), there could be extra political pressure on the Fed (yes, I said it)to tighten its wallet, I guarantee it. Regardless, rates will be targeted upwards eventually, either late this year or early next. For gold to "double" again, that is, break $2000/oz, I would imagine the Fed would have to keep its target (0%-.25%) for much longer or cook up some other kind of cockamamie idea.

2) Let us not forget about the $9 trillion debt over the next ten years, and that's just a prediction by the borrowers themselves. When the Fed does tighten, it will be at the same time that the spending in Washington really picks up, and I can't say specifically what will happen in particular sectors. However, if you've ever heard of the concept of "crowding out," I believe it's a fait accompli here. Interest rates will be especially prone to increasing in these ripe circumstances, and lending in the private sector will be adversely affected. That has negative implications for employment and the ability of businesses to pay back their debts; thus, I also believe that another recession, sooner rather than later, is not unreasonable. This would, of course, put pressure on other currencies and gold.

So, what do we conclude from this? I have no idea. I think this situation is much more unique than what some would have you believe, when they say to "look at the 1970s" or "remember 2001." I think there is some time yet to watch the tide of events, specifically, the health care debate, and the 2010 elections, among many other things. I wouldn't turn all my assets into gold just yet, but as a professor told me not too long ago, a %10 assets-in-gold insurance policy never hurt anybody in times like these.

Chart and other information can be found at Goldprice.org.