What $1,600 Gold Really Means for You

The prices have been rising and many are finding it hard to ignore and many are also wondering what that means for them. Gold prices can be used as a protection against falling currencies and the author encourages investors to take advantage of any price drop in gold.

By Chris Barker
Posted 4:00PM 07/18/11
Daily Finance

Most people don't pay too much attention to gold prices. But the higher they climb, the tougher they are to ignore: Higher prices mean more annoying TV commercials that try to make gold investment sound like a one-way trip to paradise, and more mall kiosks offering to relieve shoppers of their "junk" gold.

As gold surges past yet another milestone -- more than $1,600 per ounce, with silver reclaiming $40 -- it's tempting to rummage through your jewelry box and raise a bit of cash. Hold your horses.

There are other, better ways of making money off rising prices (I'll show you how in a moment). But first you should know why gold is spiking and how the other news of the day might affect future prices.

Gold as an Insurance Policy

You may commonly hear gold referred to as a "fear trade," or an "insurance policy" against worst-case scenarios for our financial system. But such overly simplistic labels fail miserably at explaining the metal's persistent, almost orderly appreciation over the past decade.

During 2008 when fear was rampant -- far more observable than it is today -- gold should have surged, right? The exact opposite happened, and gold tumbled violently. In fact, the SPDR Gold Trust (GLD) suffered its worst annual performance since inception. So much for insurance.

Gold as Money

Even though President Richard Nixon removed the U.S. dollar's international convertibility to gold in 1971, gold remains a currency. Despite our modern financial system's attempt to leave gold behind, even former Federal Reserve Chairman Alan Greenspan in 2009 conceded that "gold still holds reign over the financial system as the ultimate source of payment."

Most nations on the planet still hold stacks of gold bullion within their foreign currency reserves. But gold isn't just any currency. It's unique in that it remains utterly impervious to the burdens of debt, default risk, and other ailments that are weighing so heavily upon many of the world's major unbacked paper currencies.

Compared to the value-eroding euro and U.S. dollar, gold offers a far superior record of enduring purchasing power over the long haul. Gold's meaningful price gains offer the clearest indication of that outperformance from the perspective of long-term savers.

Basically, gold is a currency that competes with (and trades against) the full array of paper currencies. Yes, gold jumps upward when eurozone debt crises explode, or politicians in Washington, D.C., fail to achieve a timely accord on key deficit reductions. But a currency link exists between those events that are supportive (or unsupportive) for gold, and the resulting changes in price. Gold goes up when the United States flirts with default by pushing the debt-ceiling impasse to the final hour, but that is because those actions cause further damage to the outlook for the U.S. dollar.

What Next? Gold at $2,000? Actually...

Now that gold prices have busted through the $1,600 threshold, the natural question arises: What next?

No one can predict future prices with absolute certainty, but I suspect a final-hour agreement to raise the U.S. debt ceiling may trigger a near-term rally for U.S. Treasury bonds and the U.S. dollar, which could place gold prices under a bit of pressure.

Gold has now nearly doubled in price since I offered 700 billion reasons to own some back in 2008, but that doesn't mean it's too late to get started now. I encourage investors to welcome any such weakness in gold as an opportunity to hop on board for what I believe will be a journey to at least $2,000 per ounce.

How to Get in on the Gold Rush

Although trustworthy bullion vehicles like Central Fund of Canada (CEF) offer one-stop access to gold and silver bullion exposure, I recommend gold mining stocks as the most profitable road forward.

For reasons I explain here, I consider Northgate Minerals (NXG) the greatest gold stock in the world, followed by additional top picks Brigus Gold (BRD) and AuRico Gold (AUQ). Goldcorp (GG) remains the cream of the crop among the largest producers, although Newmont Mining (NEM) entered bargain territory before this latest golden surge.

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