Why gold is a good long-term investment

published 21 July 2006

Gold is now back above $650/oz at the time of writing. At that level, the price has recovered more than 50% of the sharp losses from earlier this year. There is no doubt in our minds that we are witnessing a major investment phenomenon. This bull market in gold might yet even eclipse the extra-ordinary gold bull market that ended in January 1980 when gold was priced at nearly $900/oz.

In real terms, for today's gold to match that price it would have to be over $2000/oz. However, at this point in time, we simply expect gold to reach our next target of $1000/oz. As a consequence, gold-related investments will be star performers.

The monetary policy adopted by the world's central banks to fight off an economic slump and the threat of deflation, was to increase money supply and create economies where debt was reclassified as a virtue. The process has been one of currency debasement and you don't have to be smart to work that out! Such a process is in denial of basic principles but was considered appropriate because it deferred problems that might, if given time, hopefully evaporate. But if they don't evaporate then they accumulate like a cancerous growth.

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Above all else, we consider that gold will be the beneficiary of those policies and in spite of some volatility, a safe long-term investment - at least until the taxi driver who drives you to an appointment tells you about his gold investments, the waitress and waiters in the restaurants you eat in tell you about their gold investments, and your hairdresser, who has to find something to talk about, tells you about his/her gold investments. At that point, we would certainly say it is the time to sell. No-one knows what price gold will be at that time, except to say that if this bull market behaves like all other bull markets known to man, it will be much higher than anyone expects it to be.

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