Nobody Loses When They Invest In Gold

Exactly as buying gold has its staunch advocates, it has equally strong adversaries. Why? Because some feel and argue that gold too is prone to bubbles, giving the classic example of the 1980’s, when it cost 850 dollars an ounce, and then its price plummeted and had not risen again for over two decades. But what they don’t seem to notice or deliberately ignore is that the inflation was soaring at the time and everyone bought gold out of fear. The USSR’s invasion of Afghanistan and the outbreak of the Islamic revolution in Iran were key factors in the sweeping political changes that made people confused and afraid. Therefore, they invested heavily in gold to protect themselves against what it seemed a global crisis (but it wasn’t).

While this is the example that detractors use against investing in gold, they also have ‘evidence’ against the advantage of using gold as currency, giving again the classic example of its price being manipulated by the US government when the national currency was backed by gold. But what really happened was that President Roosevelt obliged the American citizens to sell the gold they owned at the official price and, once the government had the entire gold safe in its reserves, it raised its price to the real rate, which was some 15 dollars per ounce higher. In this way, its price became consistent with the overall inflationary prices, and this unpopular measure actually helped the country to overcome the great depression.

Besides, when President Nixon gave up the gold standard, the population was allowed to buy back their gold, of course, for market prices; however, the massive government’s sales kept them rather low. As regards this American example, had someone lost? In the first case, all the prices increased due to inflation, except for the gold price – so it had to be adjusted, given it was the true ‘measure’ for money. In the second case, the abandonment of the gold standard meant that US didn’t have to pay in gold their debt to foreign governments and also that citizens were free to invest in it, only the relation between demand and supply driving then gold rates.

Gold prices from 2004 to 2009 were on average circa 717 dollars, while those in 2010 have been above 1,000 dollars. But the context now is completely different. On the one hand, there is an apparent global financial crisis originated in the US with the credit crisis (just look at the fate of major banks and the fluctuations of major currencies!), on the other, the demand not only outpaces the supply but is uncontrollable, constantly increasing.