Tuesday, October 21, 2008

Gold versus the US Dollar

We're getting very close to a trend change in the US dollar and gold. As I write this, the U.S. Dollar is up to near the 86 level from the 71 level in March. This is a gain of roughly 21% for being in cash over the past 7 months (not to mention the potential further gain by being out of stocks recently)! Cash has clearly been king over the past 7 months and the U.S. dollar has been the best and safest place to be for the average investor.

Meanwhile, the investment near and dear to my heart (gold) has been taking it on the chin since March, falling from a high of $1030/oz. to near $750/oz. now, a loss approaching 30%.

However, the tide she is about to turn. Take a look at the chart below, which overlays the U.S. Dollar index chart (red and black squiggles) and the price of gold (black line) between 2004 and today's closing prices.

I believe we're at a similar juncture in time as July, 2005 in terms of what comes next for the US dollar and gold price. At that time, the U.S. dollar was finishing its second-to-last price leg up and gold was just finishing its correction. A few weeks later, the dollar was going down and gold was going up. In fact, gold at this time went up from $425/oz to $725/oz in less than a year, a gain of 70%.

The bottom line is that it's a great time to trade some of your stocks or extra cash for physical gold. Insurance is rarely so cheap and buying physical gold as an insurance policy can also pay a dividend of price appreciation and be passed on for generations.

Also, for those who think the gold price is simply the inverse of the US dollar, I ask you to re-review the chart above during the time period between March, 2005 and March, 2006 when both investments went up in price together.

Repeat after me: stocks and real estate going DOWN, gold and cash going UP. The price of one ounce of gold will equal the price of the entire Dow Jones Industrial Average at some point within the next 10 years and stocks will be a LOUSY investment until this occurs.

Wikinvest Wire