Understanding the Proper Use of Gold and Silver

For a couple of years now, many investors have been bombarded with claims of hyperinflation and a Zimbabwe-like fate for the U.S. dollar. These gold bugs would have you believe that gold has value as a form of currency. They have made these claims hoping that everyone will line up to buy gold, so as to raise the price.

The swarm of gold bugs has reached out to cover every crevice of the media, from television and radio networks to print media and the Internet. And their efforts have been quite effective. Today, gold ATMs are being rolled out across the U.S. to take advantage of the hype generated by this misguided and deceptive movement of gold pumpers.

As I have discussed many times in the past, predictions of hyperinflation and a Zimbabwe-like fate for the dollar are complete nonsense. In my opinion, anyone who states otherwise is either a fool or else is lying in order to pump up the price of gold. [1] [2] [3]

Others have positioned gold as a hedge against deflation. While this is a valid investment strategy, the problem is that the U.S. is unlikely to face a deflationary period of long duration, but rather intermittent bouts of deflation over the next several years. The reason for this is simple. The Federal Reserve remains committed to printing its way through this economic depression. As you can imagine, this is only going to increase the duration and severity of this dark period.

Furthermore, because gold and silver experience bull-bear investment cycles of very long duration similar to other commodities (although I do not consider gold to be a pure commodity), a buy-and-hold strategy for gold and silver is very risky for those who do not have a relatively low cost basis because gold and silver are now in the later stages of their bull market cycle. The lower one’s cost basis, the larger one’s cushion to protect against price corrections, or even a trend reversal signaling the beginning of what promises to be a very long and painful bear market cycle.