How to Turn $45 into $14,000

Gold at $1,000 an ounce begs the questions: Time to buy or sell...?

THERE'S A TIME to Buy Gold and there's a time to sell it. Which time is it? asks Bill Bonner in his Daily Reckoning.

The question rises with the Gold Price itself. It needs an answer.

The price of gold today, adjusted for inflation, is about where it was 26 years ago. After peaking out at nearly $2,000 (again, in 2009 dollars) back in 1980, the price fell to the $1,000 level (in today's money) in 1983.

We were gold bulls back then. And we were idiots. It was the end of the gold bull cycle, not the beginning. The gold price fell for the next 17 years.

Some people draw the wrong lesson from this experience – that gold is always a bad place for your money. The Financial Times:

"In spite of low interest rates, that make Owning Gold cheap, the opportunity cost of owning it is still unattractive in the long run. Smarter ways to anticipate inflation include bricks and mortar, mineral rights or even equities, all with vastly superior historical returns."

But we would prefer to look at it a little differently. Gold is not always a bad place for your money; and we are not always idiotic.

What were the returns from stocks over the last 10 years? The Dow has lost about 15% in nominal terms. In real, inflation adjusted terms, it is probably down nearly 40%. Meanwhile, gold has nearly quadrupled.

Was it smart to buy stocks or bricks and mortar during the '70s? Not at all. Stocks bounced around, but they were no higher at the end of the decade than they were at its beginning. Meanwhile, high inflation rates took a big toll on real values. Stock market investors lost 75% of their money - maybe more. As for those who bought bricks and mortar, they lost too - but it's hard to say how much.

And meanwhile, Gold went from $41 an ounce to over $800.

Which would you prefer?

As you can see, dear reader, timing is everything. There are times to be long gold. And there are times not to be.

For thousands of years gold has been the money of last resort. It is the money you can trust. They can't make more of it. They can't counterfeit it. They can't put extra zeros on it and pretend it is worth more.

But it is most useful when other money goes bad. Inflation rates in the United States during the '70s went over 10%. Clearly, gold was a better thing to own to protect your wealth than dollars. You could have bought an ounce of it (albeit outside the United States...it was still illegal for private citizens to hold gold in America) for, say, $45 in the early '70s. By 1982, you could have used that single ounce of gold to buy up the entire list of Dow stocks. Gold and the Dow traded at a ratio of only one-to-one that year. Then, if you'd held onto those stocks, you could have sold them in 2006 for $14,000.

Not bad, huh? Two transactions. Forty-five bucks to $14,000. Invest $100,000 and you would have ended up with $30 million.

But back where we are now, is gold still in a bull market...or at the end of one? Are we idiots for holding it now...or idiots for not buying more?

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