Gold Price Rises 29.8% in 2010 to End a Stellar Decade

2011-JAN-03

Gold rose 29.8% in 2010 against the US dollar. It is gold's second best annual gain this past decade and the tenth year in a row it climbed against the world's reserve currency.

Gold also rose last year against eight other major world currencies, but its greatest appreciation this past decade was against the US dollar. The following table presents the annual change in gold's rate of exchange this decade against nine major currencies.

Gold continues to excel as one of this past decade's best performing asset classes and continues to garner the attention it rightfully 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.

Nevertheless, it is understandable if we ask ourselves, can gold keep climbing higher? Rising ten years in a row is clearly exceptional, so it is reasonable to ponder whether gold can keep this upward path. Yes, it can, and the reason is straightforward; we are witnessing the destruction of national currencies.

As long as governments and central bankers pursue policies that erode the purchasing power of the currency they manage, gold will be exchanged for that currency at an ever rising price.

It is important to recognize that all national currencies circulate because of government fiat, i.e., force. Governments use legal tender laws and other instruments of force to keep national currency in circulation. Because their purchasing power is being eroded, national currencies no longer meet the goals of what currency should be or the needs that currency should fill.

Gold is the numéraire - the measuring stick - that illustrates how badly national currencies are being managed. Therefore, unless government policies change - and I see no prospect of that - the price of gold will continue to rise.

Consequently, it still makes sense to stay with the same strategy that we have been pursuing throughout the last decade. Continue to accumulate gold under a steady cost averaging program. Make gold purchases part of your regular budget, and 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. That conclusion is clear from the above table.

While 2010 was a great year for gold, it was the best year of the decade for silver. Silver rose against all nine of the major world currencies, topped by a spectacular 97.0% jump against the Euro. Silver's results are presented in the following table.

The above table makes clear that silver is more volatile than gold. 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 silver's continuing outperformance against gold over the long-run, as is evident from the above tables. Silver has average annual rates of appreciation in all nine currencies that are higher than gold.

To conclude, we should assume that gold and silver will both appreciate again in 2011. After all, nothing has changed. The reasons that have been driving the metals higher all decade long remain in place. Governments and central banks are pursuing policies that are destroying the purchasing power of national currencies.