U.S. debt is skyrocketing with no end in sight. And while the
dollar has recently functioned as a short-term safe haven, its
long-term fundamentals are deteriorating.
To put it in perspective, U.S. public debt in 2000 was $3.4
trillion. That has now more than doubled to $8.6 trillion. The rate
of increase is skyrocketing, with
spending of $1 trillion in 2008 and $1.9 trillion in 2009 alone.
Current Congressional Budget Office estimates total debt of $5.8
trillion in 2008 to more than double to $12.6 trillion by 2014.
That means in the six years (from 2008 to 2014) the country will
borrow and spend as much money as it had since its founding in 1776
all the way up until 2008.
is typically as strong as the economic fundamentals behind it. The
Government Accountability Office (the U.S. government's auditor)
recently said the United States is on a fiscally "unsustainable"
path. This skyrocketing debt will likely cause a
in the dollar, and many are forecasting runaway
if we don't get our fiscal house in order.
As a result, many predict the dollar will resume its plunge during
last decade when it fell more than -40% against other major
So if the dollar can't satisfy the world's penchant for safety
amongst unprecedented uncertainty, what can?
How about gold?
Gold serves as a safe-haven investment, holding
in uncertain economic times and isn't tied to the fortunes of any
country or currency.
Gold prices have more than quadrupled since 2001 when it traded for
less than $300 per ounce, but this could be just the beginning.
Today's uncertain markets are prompting a trickle into gold that
could turn into a flood in the months and years ahead. Just this
year, the price of gold has risen +23% to about $1200 an ounce from
the average monthly price of $972 in 2009.
Recent strength in the price of gold portends well for the future.
The last time gold had a sustained bull run, the price increased
40-fold from an average of about $35 an ounce in 1970 to a high of
more than $800 an ounce in 1980.
Gold Prices in the Past 36 Years
I think the bull run in gold could just be getting started. And
as my colleague Nathan Slaughter mentions often, gold is still well
off its historical highs when adjusting for inflation. Just take a
look at the chart below.
SPDR Gold Shares (
exchange-traded fund (
that seeks to replicate the performance of the price of gold
bullion. The fund is a pure play on the price of gold as it holds
the physical metal itself as opposed to equity shares of gold
mining companies or other less direct gold plays. Each share
represents about one tenth of an ounce of gold bullion at current
is a fantastic modern day investment that makes owning gold just as
easy as buying a stock or
. Unlike the old fashioned way of investing in gold which involved
taking possession and storing the actual metal, GLD enables
investors to own gold through an easy to purchase vehicle with NYSE
liquidity. Investors can buy or sell shares at will any time the
market is open.
Gold is a great way to hedge a portfolio against inflation and a
falling dollar, but it is a tricky investment. It's not necessarily
against down or volatile markets. In fact, gold prices actually
fell below the yearly averages in the peak months of the financial
crisis in late 2008 and early 2009. As well, gold doesn't
necessarily perform badly in up markets. While U.S. and world
markets soared in the past decade, before the financial crisis,
gold prices rallied at the same time.
More than anything else, gold is a safe haven currency substitute
during times of uncertainty or inflation. And these uncertain times
are enticing investor appetites. According to
The Wall Street Journal
, central banks are increasingly shifting money out of euros and
into gold. This led to gold hitting an all time record high price
of $1243 an ounce on the New York Mercantile Exchange in early
July. If uncertainty continues, so could the exodus into gold.
Action to Take -->
In the short term, the price of gold can be volatile and
unpredictable. But, given the extraordinary degree of uncertainty
in today's economy and the possibility of inflation in the future,
it's a prudent hedge to have some exposure to gold. GLD is a great
way to not only hedge a portfolio, but also gain exposure to a
possible massive run in gold in the years ahead.
-- Tom Hutchinson
Tom has a 15-year history as a financial advisor with UBS
constructing investment portfolios. He is an expert at making daily
buy and sell decisions for stocks, bonds, mutual funds, unit
investment trusts, annuities, and structured investment products.
He has published articles in numerous financial publications
regarding the economy, breaking news and individual stocks. He is
highly regarded as a fixed income and personal finance specialist.
Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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