Financial Freedom is Worth it’s Weight in Gold

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Posted by The Savvy Retiree on March 28, 2017 in Money Saving Strategies, Personal Finances

Gary A. Scott writing on financial freedom

A collapsing U.S. dollar is one of the greatest risks to our independence, safety, health, and wealth.

That’s true whether you’re on Wall Street or Main Street. It can also affect you even if you are taking steps toward a more off-grid lifestyle based on simplicity and a more authentic connection to nature.

Yet there are many signs that the greenback’s strength is in serious jeopardy.

As an investor – and a successful homesteader – who started accumulating and speculating in gold almost 50 years ago, I have learned (often the hard way) that precious metals should only be accumulated when their price makes them a good value.

This begs the question, “When does gold’s price represent good value?”

Good value investors look for “ideal conditions” before they invest long term in gold. There are times when a rare distortion in gold’s pricing occurs and the price drops to a point (that history has shown) where it will “almost always” rise.

The words “almost always” indicate that there is risk. There is risk that a fundamental has changed and the distortion will not correct in any targeted timeframe. Or a new fundamental has shifted dynamics to such an extent that the distortion never corrects. There is always risk. Profit is the reward for taking that risk…but there is also a chance of loss, which is why we should seek a price that represents good value.

The way to look for gold’s ideal price is to compare it to inflation.

Here are a few theories that can help us understand the relationship between the price of gold and costs of living. These comparisons may sound academic and technical. But please bear with me because they are useful to you.

First we use gold’s 1944 price ($35 an ounce) and the costs of houses and cars and wages at the same time. Since the mid-1940s U.S. median income increased 29 times. House prices rose 47 times. The cost of cars jumped 36 times.

Gold was up 35 times in the same period from $35 to $1,225 an ounce.

If these conclusions are accurate, it means that gold was a reasonable hedge against inflation. Had you stored a pile of this precious metal in 1942 to buy a car in 2017, for instance, you could do it.

The gold/cost of living relationship also holds true for the cost of going to a movie, up 33 times, and apartment rentals – which have spiked but are still up only 34 times compared to gold’s rise by a factor of 35.

These comparisons suggest that gold is not necessarily badly undervalued at a price of $1,225 and may be priced about where it should be in relationship to other costs of living.

But another way of looking at inflation is to lump all the price increases together. Prices overall have risen 13.7 times since the end of WWII. This second comparison would suggest that gold, up 35 times, has risen far more than inflation and is not a good value at $1,225.

Then again, because gold was fixed at $35 an ounce back in the 1940s, the problem could be that whoever came up with that original price was dead wrong and wildly inaccurate. After all, economists aren’t very good prognosticators or they would have predicted and maybe helped prevent the Great Recession.

Now if we use the 1944 inflation rate and compare it to the price of gold in 1971, we see gold is a fair value at around $1,225.
Why 1971? That’s the year President Nixon told the Fed to stop honoring the dollar’s value in gold.

That meant foreign central banks could no longer exchange their dollars for U.S. gold, essentially taking the dollar off the gold standard. Unhinged from the dollar, gold quickly shot up to $120 per ounce in the open market. This $120 price gives us a glimpse of what the correct and accurate original price of gold may have been in the mid 1940s.

If this third theory is correct, the price of gold has risen from $120 (not $35) to $1,225, up about ten times, but less than the 13.7 times inflation from 1945.

On the other hand, gold’s price rise from 1971 is still much higher than inflation from 1971 until now. Since 1971 inflation has pushed prices up 5.8 times. This would suggest that gold around $696 an ounce would be a good value.

Since the $35 an ounce gold fixing obscures the true price rise, if we split the price half way between the $35 and 1971 price ($120), we get what may be a more accurate benchmark…an adjusted price of $77. Using that metric gold has risen nearly 16 times its original value and is completely in line with the 13.7 times increase in the overall cost of living.

A final comparison shows the price of gold since 1905 without adjusting for inflation. In this comparison gold’s actual price is almost the same as its adjusted purchasing power price, around $1,235.

We can only conclude that the price of gold is likely to continue rising and falling along with cost of living increases, from a current fair value of $1,225.

Eventually the huge American debt will fire up inflation again and that will eventually turn into mega inflation. Then gold prices may shoot sky high. In the meantime, whenever gold drops below $1,225, it’s probably a good value and investors who accumulate below that price will likely do well.

There are numerous ways for you to invest in gold and silver, as a short-term speculation for quick profit or for long-term accumulation to combat erosion of the value of the dollar or whatever currency you happen to hold. Whichever approach you choose, if you apply these value principles your odds of increasing profits and avoiding serious losses will improve.

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