Investing in Gold: Think of it as a hedge

With gold reaching $1,000 per ounce again, many are asking if gold is a good investment. My answer is always that gold in not an investment, but rather a hedge against currency.

If the price of gold were to drop to $500, that would mean that our dollar was stronger. Conversely, if the price were to rise to $2,500, it would mean that our dollar was weaker, but your buying power would be preserved.

If gas were $10 a gallon and gold was $2,500, your ounce of gold would purchase as many gallons then as it does today at about $3 per gallon. One could say they made $1,500 an ounce, but in reality that $2,500 would only buy what $1,000 would buy today.

As you read this, here is a point to keep in mind: We price things in dollars. As Americans the dollar is our vehicle of commerce, but in the world there are many vehicles. Gold has value all around the world. The price of gold is valued in each country's own currency, but there is always an exchange value for gold. So, even though we price gold in dollars, remember it has value in euros, pounds, rupees, yuan, pesos, lira, or any other currency you can think of.

Let us look at two different scenarios that occurred in the world over the last couple of years. First, deflation. In March 2008 gold first achieved $1,000 per ounce, but then fell away to about $700 in November of that year. At the same time, the world was experiencing deflation. Everything went down in value; stocks, real estate, the dollar, the euro, oil, the yuan, gold, silver, copper, steel, everything. At $700, the ounce of gold still bought a similar equivalent of other assets as it did when it was $1,000. The only difference was that everything was now priced at lower levels.

Now let's look at the inflation side. Since the bottom we achieved in the fourth quarter of 2008, many commodities have re-inflated in value. Stocks are back up a good percentage since the beginning of the year, oil has risen again, and gold is back over $1,000. The dollar is not stronger, but commodities are. It now takes more dollars to buy the same commodities because we have experienced some inflation.

With inflation and deflation there are gaps that occur in the pricing structures, as not everything rises or falls at the same rate. So looking at the scenario we did earlier, you could make the argument that gold has inflated faster than real estate or stocks since the deflationary period we experienced last year.

With the projection of billions and trillions of dollars being printed it is a likely scenario that our dollar will continue to succumb to inflation. If this occurs, gold could likely be $2,000-$2,500 per ounce. Buying gold now could be called investing, but I always call it hedging.

• Allen Rowe is the owner of Northern Nevada Coin in Carson City.