My wife isn't the only one who likes shiny metals...

At one time when I still naively believed what I heard from the government and the mainstream media I thought of gold as simply something from which jewelry was made and I could not understand why anyone would consider investing in such a relic.

As I learned to question and as I learned more about the US government's "management" of the economy I grew to appreciate the value and importance of gold.  Money based on a commodity that cannot be manipulated by governments and can act as a store of value and a safe haven.  What a concept - sign me up!

While, of course, no one knows what the near term future holds for gold and the last 10 or so years have seen tremendous appreciation of this precious metal.  The next 10 years may be a bear market for gold (though I doubt it given our debt levels, the printing of money by the Fed, currency devaluation wars and more) there is no question in my mind that gold can act as a store of value in ways that the US does not today.

Looking back, over the centuries there have been many different forms of money including barley, shells and, most commonly, gold and sliver.  While the US dollar used to be a commodity money (a dollar could be converted to a set amount of gold upon request) with the dollar devalued a few times overtime before finally becoming fully a fiat currency (a dollar cannot be converted to a set amount of gold or any other commodity) in 1971.

 

Store of Value
One of the greatest advantages of gold to the average person is the inability of governments' to manipulate the value of the metal (cannot be inflated and cannot be printed at will)..  While overtime more gold can be mined is it a slow and expensive process ensuring that it will remain a stable store of value over time.  Contrast with the US dollar which has done anything but remain a store of value.  For example, the US Geological Survey estimates that in 2010 2,500 metric tons of gold were mined with total mined gold in history of approximately 165,500 tons through 2009 according to the World Gold Council, a year over year increase of total mined gold of about 1.5%.

Safe Haven
As discussed in a previous post the US dollar has been ravaged by inflation with the purchasing power of the dollar declining significantly while the Federal Reserve has been in operation.  Gold can help protect against government induced inflation.  The US government (and many other nations) have waged currency wars over the past few years with each trying to devalue their currency relative to other currencies in hopes of giving an edge to export industries.  Gold can help protect against such devaluation.  With the federal government on the hook for over $15 trillion in debt I have no doubt that the creative "solutions" our esteemed leaders may attempt to wiggle out of repayment will not bode well for the confidence in the dollar.  Ultimately no fiat currency has stood the test of time, all have fallen while gold and silver have used as a medium of exchange for thousands of years.

Volatility
While I have every confidence in the long term benefits of gold relative to the US dollar given the inflation targets of the Federal Reserve, the debt levels of the US, and the growing awareness of the general public of the store of value gold represents but that is not to say there will not be ups and downs, sometimes severe, along the way.  Just looking at the weekly percentage change in the price of gold October through November of 2011 in the chart below we can see relatively large swings week to week.  Again, one must look at gold over the long term rather than short term gyrations.