Gold bugs have been pumping up gold as an investment for years.  Anti-gold bugs claim we are in a gold bubble right now.  Who is right?

I have a positive overall outlook for gold in the next 2-5 years for several reasons:

1. Gold has never fully recovered from it’s peak of $850 an ounce in 1980.  This was a real gold bubble and in fact one of the larger financial bubbles historically.  In inflation adjusted terms, that price today is equivalent to around $2,200 an ounce.   Gold has a long way to go to reach another peak like that since it is currently trading at $600 an ounce.

2. Why should the price of gold go up in the long run?  Gold doesn’t *produce* anything.  It’s not a company that has a product and can grow over time.  The answer is that gold has had fundamental value as a means of storing value for centuries.  While governments can print as much paper money as they want, the supply of gold is fundamentally limited.  So  gold is a real means of storing wealth.

3. Gold went through a 20 year bear market from 1980-2000 while the U.S. economy surged.  This has created a generation of investors who do not even have gold on the radar.  I bet if you asked people at a party, 9 out of 10 would have no idea that gold was even on the move.  They’d probably be surprised to learn that just five years ago gold was trading at $250 an ounce.

4. In the event of a dollar collapse or devaluation, both US and foreign investors will likely have a flight to hard assets.  Gold is one of the easiest ways to preserve wealth against a devaluation of paper money.  If you have not read “The Dollar Crisis” by Richard Duncan, put it on your To Read list.  The basic thesis of the book is that the current global monetary situation is unsustainable and that the dollar is headed for severe devaluation.  More on this in future entries…

5. There are now trillions of dollars in hedge fund money just waiting for the next big investment vehicle.  If the Dow does not continue to grow, where will they invest next?  Their ability to make huge swings with the push of a button give gold the ability to skyrocket in a financial crisis.

6. Finally, gold is a basic hedge against financial crises.  It should probably be a part of any diversified portfolio.  But if you’re worried about the US equities market and housing market like I am, a larger investment in gold may make more sense.

More on this topic in the future.