Is Gold a Good Investment in 2009?

How Good of an Investment is Gold Right Now?

The markets are volatile - a recent run-up suggests that a full economic recovery might be closer than we think. Or does it? The recession that led to the Great Depression had several short-lived recovery periods on the way to a prolonged downturn. While there are indicators in the manufacturing, building, infrastructure, utility, and technology sectors that a recovery is on the way - the financial sector appears to still be in dire straits. Despite the apparent excellent performance of late of some of Wall Street's bigger players, the facts remain that there is an excess amount of debt hanging around and increasingly dangerous levels of leverage.

Should I Invest in Gold or Stocks?

The average compounded annual return for gold since the early 1970s is close to 10%. The annual compounded rate of return for stocks, on an inflation adjusted basis, for the same period is even higher. The difference is that gold is a commodity. It does not pay dividends or interest, and historically, when adjusted for inflation, returns have not been nearly as solid as those for stocks.

Commodity Versus Credit-based Systems

The fact is that despite the credit crisis, developing nations are increasingly adopting a credit-based economy. It makes transactions more efficient, and more secure. There is much less chance of an electronic transaction being hijacked then there is of you being mugged on the streets and robbed of your cash or gold. But does the same hold true at home?

The Risk of Hyperinflation

The reason we are in a deep recession now is primarily because the economy needs to adjust, in other words correct, for all the rampant, credit-based spending that consistently lowered interest rates have prolonged. What is hyperinflation? Hyperinflation is a period of rapid inflation that leaves a country's currency virtually worthless. Argentina went through this type of inflation from 1975 to 1991. The end result: one 1992 peso is equal to 1 trillion pre-1983 pesos.

Is it possible that we will face hyperinflation here in the US? Some believe it is, especially if the government continues to prevent a natural correction from taking place. If that's the case, we will undoubtedly see a rush, from the failed confidence in the dollar, to gold.