If history has taught us anything, it is that governments often mismanage and ultimately destroy their currency systems.
From the Roman denarius at the beginning of the first century A.D. to Chinese 'flying money' in the 11th century to the French franc and the first Massachusetts Colonial notes, we've seen nothing but devaluation.
Some have even referred to today's American dollars as 'toilet paper money.'
And each time government currency, also called fiat money, fails, we're reminded of the main reason gold is meant to be money. Gold retains its value because it is -- and will remain -- relatively scarce.
Here's why I remain confident that gold is a smart investment:
Gold vs. Paper
Consider this. There are roughly 10 billion ounces of gold on the planet, and all the gold mined in a year amounts to roughly 50 million ounces; that's a half percent increase in supply per year. So it can be said gold's inflation rate is a steady 0.5% annually.
In contrast, paper money is neither scarce nor steadily increasing in supply, making it a crummy store of value. Take the greenback for instance.
The amount of U.S. dollars in circulation (base money) increased from $800 billion to $2.7 trillion (35% per year) over the last four years alone.
This rapid increase in dollar supply dilutes the value of existing dollars in the same way the sudden discovery of a stockpile of Honus Wagner baseball cards would reduce the value of the current cards in existence.
The Protector of Purchasing Power
Over the last decade, the dollar lost 20% of its purchasing power, according to the American Institute for Economic Research. Consequently, the price of most stuff we buy, like oil, is going up.
In 2011, the average price for one barrel of oil was roughly $87. Ten years ago, $87 purchased nearly four times the amount of oil.
On the other hand, an ounce of gold purchases slightly more oil than a decade ago.
Lest you think I'm cherry picking oil to make my point, take a look at a couple of other randomly selected commodities.
In January 2012, it cost $24 for 100 pounds of sugar. Ten years ago, the same $24 could have bought over 300 pounds.
On the other hand, an ounce of gold fetched roughly 5,000 pounds of sugar a decade ago and today an ounce of gold buys nearly 7,000 pounds of sugar.
Today, coffee costs roughly $1.09 a pound. Ten years prior, $1.09 bought over four times the amount of coffee.
On the other hand, an ounce of gold currently buys around 1,500 pounds of coffee as opposed to 1,300 pounds a decade ago.
But who cares, as long as wages keep pace with the rising cost of goods, right? The problem is they often don't. Median household incomes are 10% lower today than a decade ago.
A Word on Deflation
It would be misleading to ignore the fact a paper money supply can contract, leading to falling prices (deflation), in which case the dollar will rise and the price of gold will fall.
However, the purchasing power of gold typically remains intact because the dollar value of everything else falls at a faster rate. For example, in 2008, gold prices fell approximately 8% while oil prices fell approximately 54%.
Be it inflation or deflation, gold retains its value. It behaves like money should.
The Investing Answer: It's a good time to consider buying some gold -- or better yet, gold stocks.
I like the gold streamer Sandstorm Gold (OTC: SNDXF.PK). This company finances gold mines and in return gets the opportunity to buy gold produced from the mine at a significant discount.
The stock has nearly doubled in price since it hit my radar last October, and it will likely continue to rise as long gold prices surge and I don't buy it. Keep in mind: this is a pink sheet stock, meaning the company doesn't have to disclose as much information as an exchange-listed security.
For the more risk-averse investor, there's Barrick Gold Corp (NYSE: ABX).
Barrick Gold is a behemoth in the gold mining industry with a market capitalization of nearly $50 billion. The company boasts the industry's only 'A' credit rating. Barrick is also very geographically diverse, with mines in five continents.
You should also take a look at SPDR Gold Trust (NYSE: GLD) for the simple reason that billionaire John Paulson is the fund's biggest investor. This ETF seeks to replicate the performance of the price of gold bullion, so it's an obvious winner if gold prices continue to rise.
Adam Crawford does not hold positions in any securities mentioned in this article.
