Is $5000 Gold a Myth?

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I generally not try to predict the price of anything. I’m not very good at it. If I was, I would never have purchased a condo in 2007 after its price fell 25%. I felt I was receiving a bargain. But five years later it’s worth 75% less than I paid for it, even after making $50,000 of improvements.

There’s an object lesson here, too. My condo has the exist same utility as it did five years ago, more in fact if you count the improvements I’ve made to it. Its value to me hasn’t decreased. Its value to others though has, as expressed via the price mechanism.

In 2012, I think we will see a continuation and even intensification of deleveraging – people, companies, and governments borrowing less, and lenders tightening credit standards further.

Deleveraging is inherently deflationary. This is a big reason why my condo is worth 75% less than what I paid for it.

Gold is not immune to the deleveraging process. That became apparent in the fall of 2008 after the collapse of Lehman Brothers, when gold prices fell 30% in 30 days. It’s not surprising why this happened. In a deleveraging process, debtors must liquidate their assets to pay creditors. Since gold is a highly liquid asset, it’s easy for debtors to sell it to raise cash.

This could happen again in 2012. If deleveraging intensifies, I believe gold at $1,000/oz by year-end is a lot more likely than $5,000/oz. gold or even $2,500/oz. gold.

Global central banks will of course do everything they can to prevent deleveraging. It’s possible that the endless rounds of quantitative easing will reverse this process. But I’m not counting on them being any more successful in 2012 than they were in 2011 to prevent the European financial crisis, which, at its root, represents an enormous deleveraging.

That’s not to downplay the importance of gold as the core holding of your portfolio. Gold will never lose its utility as a store of value and medium of exchange. Unlike dollars or other fiat currencies it will never have zero worth. Assuming your gold is held securely in allocated form, it has far more intrinsic safety than a bank account deposit, a money market holding, or a promise to pay issued by any government.

As deleveraging intensifies, so will deflation, but because gold is such an effective store of value, it should fall in value more slowly than almost anything else. Don’t get discouraged if the gold price is closer to $1,000/oz. than $5,000/oz. at the end of 2012. A lot of other things, especially long-term bonds, could be worth a lot less.

If you’re looking to buy, sell, accumulate, transport, or store gold safely and securely, inside or outside the United States, we can help. Contact us for a consultation today.

Reprinted with permission from The Nestmann Group, Ltd.