The best gold investment plan leads you away from bullion toward stocks

Understand the history of gold as an investment and as a currency to build the best gold investment plan for portfolio gains

In the 1930s Depression, one country after another gave up on the gold standard. Some were trying to devalue their currencies to gain a trade advantage. Others did so to avoid having to redeem their currency, which could drain their national gold holdings. Some, no doubt, were preparing for the war that was brewing in Europe and Asia.

Although the classic gold standard went out of monetary fashion in the 1930s Depression and never made a comeback, a ghost of it did materialize to take its place. This is where we will start discussing the history of the best gold investment plan.


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Learn about the end of the Gold Exchange Standard and how that still influences today’s best gold investment plan

In 1944, 44 countries met at Bretton Woods, New Hampshire, and agreed to launch a new so-called Gold Exchange Standard. The member countries of this “Bretton Woods system,” as it came to be known, agreed to peg their currencies at fixed rates to the U.S. dollar, which was in turn pegged to the price of gold at a fixed rate of one ounce for $35 U.S. (up from $20.67 per ounce when the dollar was still convertible into gold).

One key difference between the gold- and gold-exchange standards was that under the latter, only central banks could exchange their dollars for gold at the official price. This gold-exchange option was not available to other entities such as firms or individuals.

Considering the circumstances, all this worked well. After the Second World War, Bretton Woods member countries and their trading partners set off on an extraordinary period of economic growth—even West Germany and Japan prospered, and they were on the losing side.

However, President Charles de Gaulle of France resented the central role of the U.S. dollar in the system. So, he made a practice of gradually exchanging France’s U.S. dollar holdings for U.S. gold. He knew the $35 U.S.-an-ounce price was a bargain.

In 1971, French demand for U.S. gold helped spur U.S. President Richard Nixon to “close the gold window”—stop redeeming U.S. dollars in gold. From then on, trading in foreign-exchange markets determined the value of currencies. They rose, or fell, mostly on their own, but sometimes with intervention by one or more governments.

After the gold-exchange standard ended in 1971, the price of gold, interest rates and inflation all started moving up. So-called “goldbugs” predicted that the worldwide switch to fiat money would bring great bouts of inflation and currency collapses. These views helped set off a boom in gold stocks and gold-related investments and collectibles.

I understood and sympathized with the goldbug theory. But I felt that most gold-related investments, including the highest-quality Canadian gold stocks, were priced as if the great inflation was a sure thing. Investors were willing to pay extraordinarily high prices because gold seemed like a special situation that deserved a huge premium.

Gold prices wound up making a huge gain between 1971 and 1980, thanks to the inflation of the 1970s, plus high interest rates. High inflation spurred interest in gold around the world, since gold has a reputation as a reliable inflation hedge.

Perhaps more important, a lot of latent gold demand built up between 1933 and 1974, a period when it was illegal for U.S citizens to own gold. When gold became legal in the mid-1970s, gold-starved Americans rushed to buy. In 1980, gold reached a peak of $850 U.S. per ounce, up around 20-fold from 1971.

The twin factors that helped push gold up from 1971 to 1980—high inflation and high interest rates—made investors wary of stocks and the economy.

From 1980 to 2000, the price of gold dropped by around 69.4%, from $850 to $260 an ounce. The Dow Jones Industrial Average rose from 963 at year-end 1980 to 10,786 year-end 2000, an 11-fold gain.

Since the year 2000, we’ve recommended some golds, mainly junior golds that had appeal for aggressive investors. We only bought high-quality gold stocks for portfolio-management accounts, and then only to fulfill client requests.

The best gold investment plan includes gold stocks, not bullion

Gold stocks have attractive prospects and are a good choice for part of the Resources & Commodities sector of your portfolio. Our recommendations for the best gold investment plan involve investing in gold through gold-mining stocks. Unlike bullion, these stocks at least have the potential to generate income. High-quality gold stocks can pay off nicely by establishing new mines and raising their production, even if gold goes sideways for a lengthy period.

But keep in mind that no matter how appealing they look, you should limit gold stocks to a modest part of your portfolio.

Follow these guidelines to create the best gold investment plan for your portfolio

  • To profit in gold stocks, look for well-financed companies with no immediate need to sell shares at low prices, since that would dilute existing investors’ interests.
  • High-quality gold stocks should have strong balance sheets with low debt. Junior mines should have a major partner who can finance a mine to production.
  • Another key ingredient is an experienced management team with a proven ability to develop and finance a mine.

Use our three-part Successful Investor philosophy while investing in gold, or any other stock, to achieve long-term profits

  1. Hold mostly high-quality, dividend-paying stocks.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry, Resources & Commodities, Consumer, Finance and Utilities.
  3. Downplay or stay out of stocks in the broker/media limelight.

What do you think about holding gold in your portfolio?

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