Monday, May 26, 2008

Why Buy Gold?

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?

silver gold historical prices

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 market 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.

1 comment:

silverrose said...

CNBC Australia said that gold is safe heaven. Gold does not play the current dollar fiat currency. What is sad is that the rich people are the tightest and spend the least....and gain the most....