Though everyone perks up when they hear about ways to get rich quick, investments in gold should not be approached from this perspective. The primary reasons to purchase gold are an increase in financial security and to provide a potentially profitable hedge against inflation.
Historically, gold served as the foundation of worldwide economies because many currency systems either simply traded in gold or were financially based on gold.
For example, during most of the history of the US economy, every US dollar represented a claim to a small sum of gold stored by the US government. When buying food, one wasn’t simply handing a random piece of paper to the seller — one was trading a small portion of gold for the food.
During the past 100 years, this practice has gradually ceased. For the most part, governments now print paper currency that is not backed by gold or another precious metal. In other words, when you buy food, your dollar doesn’t represent a claim to gold — it’s just the paper.
Of course, because there’s plenty of paper to go around, this means the government — the people in charge of printing the money — can simply print more money. This makes their job a heck of a lot easier, and gives them a huge way to manipulate the economy without having to use harsh regulations that the people might actively notice.
For example, let’s say the US government wanted to have access to a billion dollars for a special project. If they so decided, they could easily simply print the new billion with their printing presses, and use a brand new lump of paper money to do the purchasing. They could do this without increasing taxes.
What’s the problem with this? For starters, it causes inflation.
To put it in extremely simplified terms, inflation is simply what happens when a currency is less scarce and is able to purchase less than before. The physical wealth of the nation will be unchanged — there will still be relatively the same number of cars, cool TVs, houses — but there will be more paper money. This means that it will take slightly more paper money to represent the amount of wealth that exists.
To put it in rough terms, when new currency is printed, the old currency can buy a little bit less. Considering every year new money is being printed, inflation hits nearly every year. For the US dollar, inflation is usually between 2% and 5%.
Inflation, an increase in the price of goods and services, is constantly rising. This means that every dollar a person owns buys a smaller amount of goods or services.
Gold is seen as a hedge against inflation. The reason is simple: you can’t print gold with a printing press. The government can’t snap their fingers and make more gold pop out of thin air. Scientists and magicians have spent thousands of years trying to figure out a way to make gold out of other materials, but it’s never worked.
Because gold is rare and is seen as a type of money, it has never completely lost all of it’s value. While paper currencies have been wiped out before, gold hasn’t. Gold is forever.
Government bonds and certain other investments are often unable to keep up with inflation rates. The fact that these products earn low returns during an inflationary period makes them unattractive to investors.
The unique thing about investing in gold versus many other commodities is that gold does not have different grades of quality due to age and is not subject to tarnishing, corroding or perishing. Gold mined 100 years ago has the same quality and holds just as much value as gold recently mined. Precious metals are the most undervalued class of assets and have performed better than most other classes, equities, and property over the past three, five, and ten year
When the economy trembles, gold acts as a portfolio reinforcement — it increases during economic turmoil.
Right now, deflation is a major concern for most of the world — that means inflation hasn’t even hit yet. From the trillions of dollars in spending from the governments and new money from the central banks around the world, inflation is absolutely inevitable.
Since inflation hasn’t peaked, neither has the price of gold. Gold provides a way for investors to cover themselves against the devaluation of the dollar due to inflation. When inflation stops rising, investors can sell their gold for currency as needed for living expenses. During a time of inflation, the gold in the portfolio keeps the net worth of the investor intact, while people who keep their dollars in currency or other investments lose money.
So are you worried about inflation? Worried that the government is printing too much money? Do you have a hard time trusting the dollar or any other currency? Then add a little gold to your portfolio.
Next Part: The Financial Security of Gold