6 reasons to invest in gold.....
Gold is everywhere on the planet but not in significant concentrations. It's difficult to understand the appeal and superiority of gold, but gold is respected throughout the world for its value. Because of the respect it commands, here are six great reasons investors should own gold.
Gold Holds Its Value
Gold has a history of holding its value. The price of gold if often volatile in the short run, but it always holds its value over a long-term. For this reason, it serves as a strong hedge against inflation and currency erosion.
Supply Constraints
Gold is extremely rare. According to geological data essentially all gold is found only in low concentrations in rocks. And, a new gold mine can take upwards of a decade to bring in new ore supplies, with depletion starting as soon as the first load is brought out.
From 1990 until 2008, a large amount of the supply of investment gold resulted from bullion sales from the vaults of central banks around the world. However, governments and central banks are now net buyers of gold, meaning they are buying and hoarding more gold bullion than they're selling.
Gold Doesn't Default on Promise or Obligation
All governments issue paper fiat currencies (dollars, euros, pounds, yen, etc). Fiat currencies have no real value and are backed by government decrees promising to make good on the set value. Throughout history, governments have printed too much currency, as the U.S. has done at warp speed since 2008.
Historically, governments have also created inflation and devalued currency buying power as a measure to increase trade and exports. This also makes it easier to finance debt and social programs, such as Social Security. The problem is that retirees receive promised Social Security checks with no guarantee how much goods and services the checks will buy.
Deflation
Deflation rooted in a country causes prices to decrease, business activity to slow and a central government burdened by massive debt. Money supply and credit is greatly reduced and overall spending is slowed a trickle.
Unemployment and economic depression become the norm. During these times, the relative purchasing power of gold soars while other prices drop sharply. In fact, people often subsist from a street level system of barter.
Geopolitical Uncertainty
Gold retains its value not only in times of financial uncertainty, but equally in times of geopolitical uncertainty. It is often called the "crisis commodity". When a country's government is in crisis, the reserve currency collapses and can no longer fund its deficit.
The market, however, returns to natural monetization as the means for life to continue at the grassroots level. At this point, no other significant currency in the world offers any refuge, but gold becomes a universal currency.
As government balance sheets weaken, global banking systems deteriorate, and deflation sets in, gold in a portfolio makes good sense.
Portfolio Diversification
As emerging markets have grown, increased demand for gold has risen. In these countries gold is often intertwined with the culture, and new money is available to stockpile bullion. India and China are two nations that are large gold consumers.
Many Americans are beginning to see commodities, particularly gold, as an investment class to allocate money. A characteristic of a diversified portfolio is one that has investments not closely correlated to one another.
As bonds have negative correlation to stocks and rising interest rates, gold also has negative correlation to stocks and rising rates.
Gold tends to prove its own worth as money. Gold is an "insurance policy" whose value to an investor is universal monetary worth.
The Bottom Line
Gold is an important part of a diversified investment portfolio, because its price increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline.
Investment demand for gold has greatly increased, but new mine supplies will not increase in the near future, with declining new supplies more likely.
Gold has historically endured as a portable and indestructible safe-haven against declining wealth. Gold over a long-term gives diversification to a well balanced investment portfolio.
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