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BUY GOLD? OR NOT?

HOW MUCH IS THERE?

All the gold ever mined in the history of mankind wouldn’t even fill a large house.  Gold is so rare it is shocking.  If we were to collect every ounce of gold from every corner of the world, we would be sitting on about 166,000 tons or 5.3 billion ounces.  The total volume of this gold would just fill a cube of 65ft.  We would be looking at a shiny big box worth about $5.8 trillion.  That’s impressive, but that’s only about 40% of the gross domestic production of the USA in one single year!  Something seems disconnected here!

STABLE SUPPLY

Given that the total gold supply is relatively stable and that very little gold is consumed in industrial processes, the annual increase in the supply of gold from current mining is relatively stable — about 1.5%.   Is there a good reason to buy gold?  Let’s think a bit longer.

ECONOMICALLY SPEAKING

The period from 1945 to 1971 is widely known as the “Bretton Woods” era. The chief aim of the Bretton Woods Agreement was to establish the rules for commercial and financial relations among the world’s major industrial states. The policy required that each country maintain the exchange rate of its currency within a fixed value—plus or minus one percent – to the U.S. dollar, which in turn would be convertible to gold at the rate of US$35/oz for foreign governments. The system collapsed when President Nixon took the US dollar off the gold standard on Aug 15, 1971 in response to growing demands from foreign governments to exchange their paper dollars for US Treasury gold. Nixon wanted to print more money to devalue US debt and in no way could he back it any longer with gold because we didn’t have enough of the shiny stuff!  At that time there was some speculation by professional economists and Wall Street that the price of gold would collapse as the US dollar ‘would no longer hold it up’. In reality, just the opposite occurred – not only did gold not collapse, but instead it began a multi-year bull market, reaching an intraday peak of $873 a troy ounce on January 21, 1980.  Holy Gadzuks, Batman, that’s 30 years ago!

THE RISK

Are you one of those poor souls that got in at over $800 per ounce 30 years ago?  If so, you will never break even given the rate of inflation and the time value of money.  Think about it for a moment: Gold pays no dividends, gold is not accepted at a register, gold cannot be used to pay the mortgage, and gold cannot be deposited in a bank for value.  In order to sell your gold for dollars, you must be successful to find a gold broker who will take the risk of losing his money when he resells your gold.  This is why gold’s skyrocketing value is always short-lived.

EXCHANGE PROBLEMS

Not one currency in the entire world uses gold as a means of purchasing power.  Gold must first be converted into the local currency before it can be used as a means of exchange.  This is the problem for the common man, but it is not true when Countries are involved.  Governments have used gold since the dawn of time to repay its debts, and that just may be the saving element!

WHY ITS GOOD

But why is gold so revered when economic times look shaky?  Money is something that functions as a medium of exchange. The ideal money has to be easily identifiable, durable, stable and free from intrinsic price fluctuations. If currencies collapse, such as Germany, Nigeria, Chile, and Iceland have in the past century, gold may meet all of these criteria and is perhaps the only material in the world that does.  Being the best form of money, gold is the traditional anti-inflation protection. Fiat currency, or bad money, can be subjected to devaluation as a result of wars, revolutions or bad government fiscal policies. In times of financial crisis, gold is the refuge of choice for those seeking a safe economic haven.

DECISIONS, DECISIONS

So do we buy gold today?  That is the $64,000 question.  In order to profit from a gold play, you need to know when to buy gold (exchanging dollars for bullion) and when to sell gold (exchanging bullion for another currency).  You see it is not easy.  Do we wait until gold drops a little more, or do we buy now?  Once we own gold, at what price do we sell or how long we continue to own it?

GOLD PEDDLING

I know every radio and television commercial selling bullion says gold will go higher, maybe $5,000 per ounce.  Who are they to say this?  Remember, those commercials are getting gold from somewhere.  So, they are unloading their gold to you, right?  Does that mean they really believe it will climb higher?  Common sense would deduce the opposite.  I fear the legitimacy and timeliness of any investment when everyone is trying to buy it.  In my opinion, it is total speculation and possibly dangerous. But, who am I to pick your next investment?  Do your homework and be sure not to risk your hard-earned retirement money on a price play.

CALL ME

If you are looking for an inflation hedge to invest in, give me a call.  I have several options to consider that actually work without too much speculation.

Jason ValaVanis graduated from the University of Central Florida with a degree in Aerospace Engineering. He performed as an mechanical-optics engineer for Martin Merietta on the Cobra Helicopter and the F-16 Fighter Jet night vision systems. He maintained a DOD secret security clearance for his work on Military sensitive weaponry. From there, he was recruited to launch Atlas Rockets for General Dynamics at the Cape Canaveral Air Force Station. At KSC, he was a Systems Launch Engineer for 19 Atlas rocket launches and was a part of placing our GPS and military satellites in Geo-Stationary orbit. In 1990, his love for Financial Planning extracted him from the space program. With his math background, he attended college again where he completed his Professional Education Studies Program towards the coveted Certified Financial Planner Boards License. After passig the two-day Board Exam, he earned his Board Certification in Financial Planning from the College for Financial Planning in Denver. He formed two financial firms where he now manages over $85 million. His focus is simple and always remains the same: Preserve wealth while increasing income, reducing risk, reducing taxes, and creating the lifetime legacies for our loved ones. Jason is a local author where he has published over 60 articles on financial planning and facing life’s money challenges. Jason Valavanis can be contacted at 321-956-7072.

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