Gold Per Ounce

Gold Per Ounce - Willa Cather half-ounce gold coin.

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The price of gold per ounce rose steadily, year after year, throughout the entire first decade of the 21st century.  Yet, amazingly, relatively few people paid much attention to it.  Smart money was slowly shifting into this real asset, but the vast majority of people were distracted by other things.

After such an impressive run, people wonder about the future price of gold per ounce.  While anything is certainly possible, the factors that have driven the price up have not abated.  In fact, an ever-increasing number of people are growing in their disinterest with fiat currencies and a desire for real assets.  Additionally, there are other reasons why gold will likely continue to rise.  People pouring into gold and silver ETF investments is just the obvious impetus.

Gold Per Ounce Price Rising Against Devalued Currency

Gold has long been a timeless store of value.  Throughout recorded history, gold has represented an impenetrable way to hold something of worth without risk of loss.  The value is inherent, and so it’s not prone to manipulation or wild fluctuation.

However, gold doesn’t pay interest, per se.  As a result, while gold would hold its value, the theoretical fact that the cost of gold per ounce would remain stable simply meant that people could seek interest and be ahead.  The rule of 72 shows that you could double your money in 10 years at 7%.  That’s the magic of compound interest.  But that’s a short-sighted view if you fail to consider that the purchasing power of the currency must be considered.  In other words, you can have more “cash” in absolute terms, but a devalued currency could leave you in a worse position than before.  As a result, a closer examination is in order.

Gold Per Ounce Levels Rising Against Inflation

A weak currency is only one potential problem.  Inflation is a huge component, especially when you consider the threat of hyperinflation.  The allure of compound interest loses its appeal if you find that the interest rate is lower than the pace of inflation.  It does little good to earn 5% on your money if inflation is at 7%.

In such a case, it doesn’t make any difference that gold doesn’t pay interest.  Interest is not serving you well anyway.  If a currency is decreasing in value, relative to other currencies or through inflation, the price of gold per ounce can increase.  What this means is that holding wealth in currency can be detrimental.  Storing wealth in gold can offset the negative effects of inflation, if not put you in a winning situation.  A 50% rise in gold’s price can make inflation at 5% seem like a mere bump in the road.

Gold Per Ounce – Inflation v. Interest Rates

The analysis gets even more interesting when you have inflation and interest rates intersect.  For instance, let’s say that interest rates are near zero, which has been the case.  Inflation is nowhere near zero.  What that means is that anyone holding wealth in currency, even aside from a devalued currency for a host of other reasons, is already losing ground.  Simply put, the same number of dollars tomorrow will be worth less than those dollars today.  Inflation will see to it that you cannot purchase as much tomorrow at higher prices as you could today.  In short, the factual interest rate is less than zero.  When the real interest rate is a negative number, the situation is horrible for fiat currencies and spectacular for gold.

Gold Per Ounce Predictions And The Recipe For Perpetual Price Hikes

An interesting study showed that negative interest rates create an environment where gold does really well and stocks to poorly.  To summarize these impressive findings, note that there was a real median interest rate of negative 1.15% between 1973 and 1980.  Gold was up 32% a year, while the S&P 500 dropped 7% each year on average.  By contrast, consider 1981 to 2001, when the median interest rate, adjusted for inflation, was 2.7%.  With a positive real interest rate, note that gold was down 3.5% each year, while the S&P 500 posted 7% annual gains.  From about 2002 to about 2009, there was again a negative real interest rate, this time about  -.4%.  Gold has been up 18.5% while the S&P has been down about 3% per year.

When people realize that actual negative interest rates cause you to lose money to inflation alone, it’s easy to see why gold per ounce prices will continue to rise.  As the factors supporting causing inflation to outpace interest rates seem unlikely to end any time soon, the cost of gold per ounce is only likely to increase into the foreseeable future, especially as people seek refuge in gold and silver funds.Gold Per Ounce