The gold market has settled recently. It’s had such a runup for the past few years, it seems to be taking a breather. I think this is just a normal profit taking situation and the metal will soon continue its climb.
There are several reasons why I believe gold will continue its march. First, let me state that gold is a constant. It never changes in value. What changes is the value of the currency that you use to purchase the metal. As the dollar decreases in value, the cost of gold increases. It just takes more dollars to purchase the same amount of the glittery metal. With the federal government printing billions of dollars each month, the value of the currency decreases.
America has a debt problem. We continue to borrow huge amounts of money each year to finance our lifestyle. One day soon, the foreign countries that purchase our bonds will realize we are reaching a point where repayment is questionable. They will demand higher returns to justify the risk, or refuse to purchase our debt. This will cause inflation that will further reduce the value of the dollar.
The Obama Administration sees no problem on the debt front, which means they don’t understand the need to address the problem. With increased spending, and static revenues, the debt will continue to climb.
Oil is also traded in dollars. When the oil suppliers from the Middle East find a safer currency for their sales, dollars will be dumped on the market causing more inflation here at home. All of this will cause the cost of gold to increase. China, South Korea, Russia and several Middle East countries have already entered treaties to exchange their own currencies instead of first buying U.S. dollars for international transactions. They are already starting to liquidate some of their dollar reserves.
There have been fewer large deposit finds of gold in the last decade. The large producers have come under pressure from their investors for better returns from the companies. When these miners pay higher dividends, they have fewer funds for development of the existing and undeveloped mines. They have less money to spend on research to find new claims. They refer to this as the gold cliff. This situation is expected to fully kick in around 2017.
Gold is something we all should consider owning. If, not if but when, the U.S. economy crashes we know that gold will hold its value while paper dollars could become worthless. Gold and silver will be the best instruments of barter in difficult economic times.