Will Gold Continue Going Up? How to Know When to Buy

 

THE CYCLE
cash flow, inflation, dollar valueAs most commodities or precious metals investors understand, as the U.S. government spends and prints more and more money and banks around the world buy up gold reserves, the value of precious metals steadily climbs. Therefore, as the value of currency (especially the U.S. dollar) decreases, the best way to preserve purchasing power is quite obviously with gold. Given the current practice of printing money, everyone should be buying gold and silver right now.

GOLD’S FUTURE
Typically investors buy an investment if they think it’s going to rise in value or produce some type of cash flow. Gold and silver don’t produce cash flow, so the only remaining question is: will the price of gold and silver go up or down?

The price of these metals is directly impacted by the actions of two groups: Congress and the Federal Reserve. Right now, Congress is spending money like it’s going out of style, and the Federal Reserve is printing money through multi-trillion-dollar stimulus programs. The price of gold and silver is a direct reflection of how much currency is being printed and how much money the federal government is spending. Thus, the question of what gold and silver are going to do over the next few years is fairly simple to answer: The price of gold and silver will likely move higher if Congress continues massive deficit spending and the Federal Reserve continues to print money through its stimulus programs.

SUPPLY AND DEMAND
Untitled-2It comes down to simple supply and demand. Central banks like the Federal Reserve, European Central Bank, and the Japanese central bank are all accumulating gold. The reason is because they don’t trust other assets, including the U.S. dollar and other currencies. Since there’s a lot of buying going on, there is also a lot of pressure on the market to adjust the price of gold upwards.

When there is more competition for the same item, prices rise. And if the price goes down, it’s because there’s less demand. Right now, there is more and more demand. Even the Chinese government is encouraging its citizens to buy gold and silver and hold it, themselves. There are a whole lot of Chinese people listening to their government. If you have one billion people thinking about buying a little bit of gold and a little bit of silver, that creates a lot of demand. Even if only a fraction of the population is able to buy a minimal amount per person, that is still millions of ounces. So, overall, I think in the next few years we will see a massive movement up in the price of gold.

If the value, or perceived value, of gold holds steady while the value of the dollar goes down, the price of gold relative to the dollar will rise. It’s a function of the currency. It’s because gold and silver really are gold and silver, while the dollar (or euro or yen) is just paper.

For example, if one dollar is worth three eggs today, the same dollar will eventually buy a single egg as more currency is printed, the result of stimulus programs and fiat currency. The egg hasn’t changed. It’s still an egg. But the paper currency has less purchasing power—66% less.

Likewise, gold and silver don’t change, regardless of how many dollars get printed. What’s happening is that the dollar is decreasing in value. Those dollars are being printed out of thin air, just as they have been since the U.S. abandoned the gold standard.

financial heroin, stimulus, economy on drugs, hyperinflation, fiatECONOMIC OVERDOSE
Since 2008 alone, the Federal Reserve has printed several trillion dollars out of thin air. The Federal Reserve prints this currency to try to stimulate the economy. Stimulating the economy by printing cash is kind of like stimulating the brain by taking heroin. Sure, the user feels great, getting high for a brief period of time. The problem is that, unless the user keeps pumping more heroin into his system, he crashes and goes into withdrawal. Then again, if he keeps pumping heroin into his system, eventually the body shuts down completely; that isn’t a solution. The Fed can’t keep pumping cash into the system indefinitely like heroin; eventually the overdose of cash will shut down the system entirely. When the stimulus stops, the economic withdrawal will be a massive recession and deep deflationary depression.

If the stimulus continues indefinitely, eventually the user will overdose and die, which is what the Federal Reserve is in effect doing to the dollar, printing so much of it that the death of the dollar is imminent if the printing continues.

A CLEAR PATH FORWARD
2014 American Gold Eagle ObverseThis market crash is inevitable. The Federal Reserve has simply supplied too much “heroin” in the form of cheap money with artificially low interest rates. The crash is going to create a lot of chaos, but ultimately, gold and silver will benefit from the crash, because they are real money. For thousands of years, these metals have been the asset that people used to protect themselves from chaos and governmental currency manipulation. They’ve been the most stable investment for people to rely on, historically, and will be again during this coming shakeout. In the long run, gold will continue rising. The wisest investment for any time, but especially in our current environment, is to buy precious metals.