Gold Shines for the Ninth Consecutive Year

2010-JAN-02

Gold has now climbed nine years in a row against the US dollar. It appreciated 23.9% in 2009, which was a dazzling performance but only gold's third best annual gain this past decade.

Gold also rose against seven other major world currencies, declining last year only against the Australian dollar. The following table presents the numbers for this decade.

Gold continues to excel as one of the world's best performing asset classes this decade, and with its break above $1000 per ounce, gold is finally getting the attention it deserves. The increasing number of news reports and other media coverage is evidence that gold is in the second stage of its long-term bull market.

The third and final stage of this bull market is still in the future, so as well as gold has done this decade, it is not yet time to take profits. I expect that gold will rise much further. Consequently, it still makes sense to stay with the same strategy we have been pursuing all decade.

Continue to accumulate gold, month-in and month-out (or bi-monthly or every quarter if one of these alternatives better suits your budget) under a steady dollar-cost averaging program. View gold to be your savings. As I have said many times - but it is always worth repeating to understand the underlying logic of this gold accumulation plan - saving money is always a good thing, particularly when it is sound money, as is clear from the above table.

As I noted one year ago: 'Some months and even some years you will be accumulating gold at a higher price, and at other times a lower price. But over the long-term your consistent accumulation of gold will be averaged in at a good price.'

While 2009 was a good year for gold, it was a great year for silver. It rose against all nine of the major world currencies, including a 53.0% gain against the Japanese yen and more spectacular gains ranging from 42.6% to 49.4% against five other currencies. Its results are presented in the following table.

The above table makes clear silver's volatility. Silver also fits well within a long-term accumulation plan, but only if you are prepared to accept the volatility that comes with it. The reward for doing so will be that silver outperforms gold over the long-run, as is already becoming evident. By comparing the average annual rates of return in the above tables, silver has done better than gold in five of nine currencies, and is not too far behind in the other four.

Given that that it presently takes 65 ounces of silver to purchase one ounce of gold, and that their historical ratio is about 16-to-1, a weighting of 67% gold and 33% silver for your bullion holdings continues to make sense. If the ratio falls to 20-to-1, for example, those percentage weightings will almost reverse solely because of silver's outperformance compared to gold.

To conclude, we should assume that gold and silver will appreciate again in 2010, and the reasons have not changed from those factors that drove the metals higher in 2009. So I would like to end with the same words from one year ago. The precious metals will climb in 2010 'given the path chosen by central banks in general and the Federal Reserve in particular. After all, who wants to own any national currency when the interest income one can receive is less than the inflation rate? Who wants to own any national currency when counterparty risk makes repayment uncertain? In short, the interest income available today on any national currency does not fully compensate for the risks one takes when holding that currency. So why lose sleep from worrying about holding national currency and what the Federal Reserve or some other central bank will do to that currency? Own the precious metals instead. But as I repeatedly emphasize, own physical gold and physical silver. Own the real thing, and do not accept paper substitutes.'