Most investors are probably aware that gold prices are at record levels. The yellow metal has experienced 10 years of annual gains—something unusual for any investment and especially unusual during this tumultuous period for the financial markets.

Gold’s rise has been so impressive that it has transcended business and financial media and it is getting notice from the non-investing world. Anyone who watches television has likely noticed commercials from businesses offering to send cash for any gold one has lying around the house. Recently acquaintances who know I work in the investment arena have asked me about buying gold.

Strategis Financial Group has taken gold and other precious metal positions in some of its strategies including recently buying gold for some client accounts. Gold purchases are made cautiously and followed closely because of the possibility of significant price volatility.

Historically owning gold has been viewed and practiced as a means of protecting against inflation. But according to the statements and actions of the Federal Reserve, inflation hasn’t been a problem in the past few years. While some people don’t believe the Fed and are still buying gold as a hedge, there is another reason that gold prices have been able to sustain this prolonged advance.

Look at the chart below, which compares the price movement of gold against the price of the U.S. dollar over the past four years. The inverse relationship between these two investments is evident.

The reason that gold has been rising while the dollar falls is that investors worldwide have concerns about the stability of the dollar. As the dollar value drops, traders and investors move money away from dollars and toward something more secure. Because of the expansion of U.S. debt and the devaluation of the dollar through government interventions, some financial experts believe that a further sharp decline in the dollar is inevitable.

Peter Schiff, CEO of Euro Pacific Precious Metals and a frequent guest on CNBC and Fox Business recently said, “It’s hard to pinpoint exactly when the dollar will collapse, but it will take a miracle to avoid that outcome in the near term. It really depends on when the creditors of the United States realize that they are not going to get their principal returned to them in real terms, but rather in grossly devalued dollars. We have already seen the average duration of U.S. Treasury debt drop below that of Greece. No one wants to buy a 30-year bond with negative real interest rates as far as the eye can see.â€?

The collapse of the U.S. dollar seems like an extreme view, but when it comes to the price of gold that doesn’t really matter. As long as global investors have concerns about the dollar and its price keeps falling, the price of gold is likely to continue its advance.
Flint Stephens