Buying gold is a polarizing investment. I know several people who are putting all of their current investments into gold out of fear of runaway inflation in the next few years. Others are scoffing at the idea, and think this is the perfect time to buy stocks, not metal.
There are arguments both for and against gold as an investment vehicle, but this article will focus on building the case for buying gold for the purposes of financial security, investment diversity, and as a hedge against inflation.
Gold and Security
Gold started showing up in coins around 800 years before Christ. It’s been doing fine ever since. Paper money, on the other hand, has had it’s ups, downs and often becomes utterly worthless. Stocks are eerily similar. This is why gold is often seen as the ultimate investment for the sake of financial security.
As James Blakely from Coinstar said:
“Gold is forever. It is beautiful, useful, and never wears out. Small wonder that gold has been prized over all else, in all ages, as a store of value that will survive the travails of life and the ravages of time.”
Remember, supply and demand dictate the financial value of an object. There’s only so much gold in the world, and gold mines have been shutting down for years. As the world population grows, so is the demand for gold over the long haul.
If you have a basement full of gold, you probably won’t starve anytime soon, regardless of what Wall Street looks like. Almost all of the gold that has ever been mined (for example, including that of Solomon’s palace) is probably in circulation somewhere.
Gold is a “secure” place to store your wealth — gold is forever. The EU and US could collapse, but your investment will still retain at least some level of its value.
Gold and Inflation
It’s often argued that gold is a great “hedge” against inflation. In other words, when inflation is coming, it’s best to stock up on gold. The thought is that since “inflation” is when your dollar loses its buying power and can’t buy as much, gold should stay worth roughly the same.
The reasoning for this is that printing money causes inflation, and you can’t exactly print gold. But is this true? Yes and no.
All financial value is based on the law of supply and demand. Something is financially worthless unless there is a demand for it from some sector of the market. If no one was willing to fork over a hundred bucks for the Mona Lisa painting, then it would be worthless.
This applies to currency, gold, jewels — everything. Everything is guided by the laws of supply and demand.
This means that while gold might naturally not “lose” value during times of inflation, its price might not necessarily reflect that. If a large number of investors think inflation is coming, they might all be eager to buy gold — meaning the price of gold goes way up before the inflation hits.
Unfortunately, this often means that the price of gold peaks well before the inflation actually kicks in. Supply and demand at their finest. Like usual, this means that if everyone is thinking that inflation is inevitable and are buying up gold, then the price is already going to be pretty high.
As Warren Buffett is fond of saying:
“Be fearful when others are greedy and greedy when others are fearful.”
The only time to buy gold before inflation sets in is when gold is still cheap — otherwise, it’s too late. So when was the best time to buy gold for the coming inflation? Easy: 2002, when gold prices were a third of what they are now.
So what does this mean for the here and now? If you think:
- Massive inflation is inevitable, and
- Investors are underestimating it
…then this might be a great time to buy gold. Otherwise, prices are somewhere near their peak, and you should consider holding onto your cash in a savings account or Certificate of Deposit and wait until another opportunity reveals itself.
Gold and Diversity
Every investing portfolio should be diversified. In other words, you should invest in enough reliable investments so that if one of the investments sours, the others will maintain your net-worth.
Unfortunately, millions of people focus on only one type of investment, such as Wall Street. This is a mistake. If the stock market “crashes” for a few years, your net worth and the funds you can get are severely hampered. There’s even a chance you can lose almost everything.
To combat the “all your eggs in one basket” dilemma, every portfolio should have at least a little something that isn’t found at Wall Street.
How to Buy Gold
Before ending this article, let me stress one thing: no matter how you invest, never invest with too much riskr.
Don’t put so much money into gold that your lifestyle will take a hit if gold prices do.
Moderation, diversity and caution are the three pillars of secure investing.
That said, the next article in this series on investing in gold will help guide you on the path of actually buying gold for yourself. You’ll find where to buy the gold, how to get the best deal, how to “time” the market, and what to look out for.
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