2. Currency Debasement
The most popular reason to own gold is as a form of money. The theory is as paper currency loses value, gold will retain its purchasing power, making it a safe place to preserve one's wealth.
"Gold is a very different investment than other commodities," says Ash. "The fact that it has been used as a store of wealth for centuries ... is 5,000 years old."
Historically, gold has traded in opposition to the dollar 32% of the time, according to data from
Standard and Poor's
. A weaker dollar makes dollar-backed commodities like gold cheaper to buy in other currencies, which strengthens demand.
As central banks dealt with the financial crisis by pumping lots of cheap money into the system, they created a nasty side effect: inflation.
China's inflation is at 6.5%, India's is 9.22%, the Eurozone is dealing with 2.5%, the U.S. at 3.6% and the U.K. is at 4.4%.
The only tool central banks have to fight inflation is to raise key interest rates, something they have to do very carefully in order not to choke off growth. But here's the rub, inflation is rising faster than interest rates, creating a perpetual negative real interest rate environment (interest rate minus inflation), which means your dollar in the bank is worth less. As paper currencies lose value, gold shines as a store of wealth.
Underscoring this fiscal tightrope are ballooning debt issues in Europe. After almost two years, the fate of Greece is still uncertain as EU members try to shore up the European Financial Stability Fund by letting it buy government bonds and by increasing its money pool.
But even the strong countries are getting weak, as the weak get even weaker. Germany reported growth of only 0.1% in the second quarter. If the country propping up the Eurozone falters, who is left?
Many think that the European Central Bank, which is already buying government bonds, will have to inject more liquidity into the market, despite inflation fears. The ECB has already raised interest rates twice this year to fight rising prices.
The U.S. is also joining the debt battle. Although Congress passed a debt ceiling increase, a 12 member group from Congress has to agree to $1.5 trillion in spending cuts by the end of the year before the debt ceiling gets its second increase for a total of $2.1 trillion. The U.S. grew only 1% in the second quarter and only 0.4% in the first, both well below estimates. High debt and anemic growth leave little wiggle room.
The economic situation is deteriorating so fast that the
is contemplating another round of quantitative easing. Although three voting presidents are ardently against pumping more money into the system, other presidents are already advocating for a third round of quantitative easing, or QE3. Fed Chairman, Ben Bernanke, has now extended the Fed's September meeting to two days to debate this issue.
"Government money printing undermines the fiat currency of the dollar," says Young. If QE3 is off the table, or if Europe stabilizes, then gold could suffer says Young, but he doesn't see any bright spots for the EU and thinks Bernanke will have to commit to some kind of QE3.
The U.S. is currently more than $14.6 trillion in debt with $412 billion in interest payments due in the past 10 months fueling rumors among doomsayers that the dollar will eventually be worthless.
"Intrinsically, the dollar is worth nothing. It's a dream painted on a piece of paper," says Rick Rule founder of Global Resource Investments. Rule predicts higher gold prices in the future because the U.S. dollar will eventually depreciate in value. "There's no particular reason why you, despite the fact that you live in the U.S., need to be a prisoner of the dollar ... use gold money, export your capital."
The dollar is also losing its mojo as the world's top currency. BRICS countries -- Brazil, Russia, India, China and South Africa -- have said that they are looking for a broader international reserve currency structure not so heavily reliant on the U.S. dollar. China is in fact conducting business in local currencies with Russia, Argentina, and soon Brazil. Continued lack love will push the dollar lower and send gold higher.