This article looks at the loss of purchasing power of the US dollar and what this might mean in the future for gold. You’ll read that the US dollar has lost 25% of it’s purchasing power since 2000. Surely we can’t be that bad here in New Zealand?
To find out we head over to the Reserve Bank of New Zealand’s inflation calculator and plug in 2000 prices versus today (Q2 2011). You’ll see that what cost $1.00 then now costs $1.37! According to the calculator that’s a 27.2% loss of purchasing power (and that’s using the “official” numbers where they substitute out goods that have risen too much with cheaper goods which actually lowers the CPI)! So even with the talk of the US dollar being toast, it doesn’t make too much difference which paper currency you look at. Our’s is no better over the long run. Anyway read on for Jeff Clarks theory as to what this may mean if this loss of purchasing power were to increase at a faster rate…
By Jeff Clark, Editor BIG GOLD, Casey Research
I was recently asked in an interview if I thought gold was going to $5,000 an ounce. “No,” I said bluntly. “I think it’s going higher.”
“You’re that optimistic?”
“No,” I replied. “I’m that pessimistic.”
Imagine the condition of our world if gold reached $5,000 an ounce – and kept soaring. We’ll likely be in a mania if that happens – but what kind of mania will it be? There’ll be some greed to be sure, but I think there’s a good chance a deeper reason will be at play. And it’s the same reason that will drive you to keep buying gold at $2,000 an ounce.
You’ll have to.
There are 101 reasons to own gold right now. You might buy because of the debt turmoil you see around the globe. You may think it wise, like the Chinese and others, to keep some of your savings in gold. Negative real interest rates may draw you to gold. You might buy because of the mere fact that demand is overwhelming supply. Or you fear inflation. Or deflation.
But most of these factors are missing one critical element: They’re not yet personal.
Most reading this have not had to flee their country, been the victim of hyperinflation, or watched helplessly as their currency went poof! Longtime investors have made money on their gold investments, to be sure, but most of us bought the yellow metal as an investment and not because of a do-or-die situation.
It’s doom and gloom to say this, but I think it’s possible and perhaps even probable that at some point we’ll all feel forced to buy gold, almost irrespective of price, due to a sudden and rapid depreciation of the U.S. dollar.
How do we get to that point? Simple: You go to buy something and realize you’ve just been priced out of the market, not because the item is too expensive, but because you suddenly realize the money in your hand no longer has purchasing power. Your reaction to that event is predictable: You feel cornered, maybe even scared, and the urgency to seek an alternative takes over.
This is obviously an inflation scenario, but it’s not exactly a stretch to get there from where we are today. Here’s why.
The following chart tracks the dollar and gold adjusted by the CPI from 2000 to present. It catches many people off guard, once they realize its implications. Look what’s happened to the greenback in the past 11+ years:
Since the Y2K scare, the dollar has lost an incredible 25% of its purchasing power. Even adding the measly interest one would earn in a traditional savings account doesn’t make up for this loss. This isn’t a picture of the dollar since the creation of the Fed or since Nixon took us off the gold standard. This is what’s happening right now – a gross devaluation of your dollar-based savings. Gold, on the other hand, has not only preserved but increased our purchasing power.
Now, imagine this scenario on fast forward. Instead of a 25% loss in 11 years, what if it occurs in, say, two years? That’s what can happen in a highly inflationary environment. At some point, given the baked-in consequences for our currency and the unwillingness of politicians to effectively deal with the problem, you one day instinctively realize, as you hand money to a cashier to buy milk and she asks for more, that it is a depreciating asset and no longer a stable form of exchange.
In other words, you won’t buy gold at $2,000 an ounce because you think it’s going to $6,000; you’ll buy gold because you fear the dollar will continue losing its ability to meet basic monetary requirements and you’ll need a substitute, something that will retain its value.
Regardless of whether the downward trend with the dollar continues at the same pace or speeds up, one thing is clear: It will continue. You must portion some of your savings in gold.
Sooner or later I think we all will have an epiphany about money that pushes us to buy gold, even if it’s at levels that would seem expensive today. When that time comes, you won’t be focused on the price of gold but on the absolute need to acquire a more lasting asset.
If I’m right, $1,700 is not a high price to pay.[For many, $1,700 at a pop is a lot of money to come up with for an ounce of gold. But Jeff found a way to buy gold and silver for $100/month, and was so impressed with the programs that he uses them himself. Check out his top two recommendations in the brand-new issue of BIG GOLD and start accumulating enough gold and silver to protect your savings from ongoing devaluation.]