Friday, August 26, 2011

A Little Gold Goes a Long Way

Today I am borrowing a worthwhile article from Casey Research on the purchasing power of gold.

Firstly though a word from the latterly 'wise' Alan Greenspan:
Gold, unlike all other commodities, is a currency...and the major thrust in the demand for gold is not for jewelry. Its not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating. - Alan Greenspan, August 23, 2011

A Little Gold Goes a Long Way

By Dan Steinhart, Junior Analyst at Casey Research

Casey readers of any duration already know how to avoid silent robbery by inflation: own gold.

Since the beginning of 2002, according to the CPI (which famously understates inflation), the dollar has lost over 20% of its purchasing power, a precipitous decline in less than 10 years. During this period, gold owners have not only protected themselves, they’ve most likely profited in both nominal and real terms. But for all of the non-gold bugs just now awakening to the doomed reality of the dollar, how much gold is actually needed to protect yourself from inflation?

Probably less than you think. The graph below charts the purchasing power of a hypothetical portfolio; each line represents a different allocation between dollars and gold, from 100% dollars to 100% gold and everything in between:


Let’s start from the bottom with the dismal dollar: unsurprisingly, if you held no gold, your purchasing power would have dropped in conjunction with the dashed gray line, down to about 78% of its 2002 level. 

But the next data point may surprise you. The dashed red line line represents a cash/gold allocation that would have maintained purchasing power at 2002 levels. How much gold would you have needed to hit this breakeven point? Only 5.75% of your portfolio! Even a gold skeptic could handle that tiny allocation: for every $30,000 in your portfolio, keep one gold eagle coin, and you’re covered against inflation.

Of course, just because that worked for the last 10 years, it doesn’t guarantee it will be enough for the next 10. Inflation will likely ramp up at some point in the near future, and when it does, you’ll want more gold. But the point remains: holding just a little bit of gold does wonders to combat inflationary erosion of your cash.

Now that we know how to break even, let’s step it up a notch. We here at Casey Research recommend a 33% allocation to gold. Under such an allocation, your purchasing power would not only have been preserved, it would have more than doubled in less than 10 years. Not too shabby.

For comparison’s sake, we also included how you would’ve done with allocations of gold all the way up to 100%. While we certainly don’t recommend such extreme positions, any outliers who held the majority of their portfolios in gold can now buy over 400% more “stuff” than in 2002.

The moral of the story? If you don’t own gold, get some. Paper dollars are shrinking before our eyes, so offset (or outpace) your losses with concurrent growth in the value of gold.

Gold in New Zealand dollars: $2126.18 per oz
Previous all time high: $2319.47 per oz (23 Aug, 2011)

Silver in New Zealand dollars: $49.19 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)

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The Anglo-Far East Company
The Original Private Gold and Silver Bullion Custodian
Your reference: an-001
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