Being not only an admirer of gold but also a gold investor,
acquaintances often ask me for me advice. They often tell
themselves "I want to invest in
gold and silver" but have fear because they don't know much
about gold as an investment. It's wise to be cautious, and to
carefully research the pros and cons of buying gold before rushing
out to find some gold coins to
invest in. So why buy
gold?
First of all, if we look at gold
prices history, we can clearly see that gold acts as a
wealth preserver. Gold is
money. Paper money used to be simply a representation of an
amount of gold stored somewhere on your behalf, but in this day and
age paper money (or fiat currency) functions separately from gold
and it is susceptible to inflation and currency devaluation.
Especially if you live here in the United States, the government is
constantly spending money it
doesn't have, and the banks are lending out money they don't have,
devaluating our currency so that our buying power is steadily
eroding. If you buy gold, however, you will maintain your buying
power longterm because gold's value doesn't deflate. It's price
fluctuates with supply and demand, but it's core value remains
constant.
Official gold prices tend to
increase along with high inflation, and when the stock market
drops. They also tend to increase in times of great instability
such as wars, when hyper-inflation is a threat. (This is true of
commodities in general, but precious metals can obviously hold
their value better than a bundle of wheat or a cow that might up
and die on you.)
Precious metals are real assets, unlike stocks and bonds, and they
react differently to changing economic conditions. Commodities
prices tend to increase with inflation. Stocks and bonds on the
other hand, tend to perform better when the rate of inflation is
stable or slowing. Since 1990, commodity prices have been
negatively correlated with the S&P 500. Since commodities are
not positively correlated with stocks and bonds, they diversify
your portfolio and help reduce risk and increase returns over
time.
Precious metals and other commodities are not only a hedge against
inflation, but also a hedge against destabilizing events or
catastrophes. Commodity prices rise during times of crisis such as
wars and stock market crashes. After the Iraqi invasion of Kuwait,
stocks dropped while commodities performed well. And during the
stock market crash of 1987, stocks dropped by 30% while commodities
held steady. There are people out there who horde gold as a way to
preserve wealth in some coming cataclysmic event. I would never
want to invest in only gold, but these people are right that in the
event of catastrophe commodities like gold will be far more useful
than stocks or cash (which will likely become unbelievably devalued
if there’s a catastrophe of huge proportions). That’s not to say
that precious metals are free of volatility. They are equally or
slightly more volatile than the stock market, but they rarely drop
at the same time as the stock market. In these volatile times with
stocks continuing to drop or stagnate, gold is an essential
investment. And longterm, with all the government stupidity
promoting the devaluation of the dollar, gold will continue to
function as a wealth-preserver for the wise.
And despite gold prices
skyrocketing, if we adjust for inflation, the prices now are
still nowhere near as high as during their peak in 1980. There's
still a lot of room for the price to climb higher.
Why Buy Gold?
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