April 5, 2009 – Gold Investing

There’s a joking line that people in the US say which refers back to the history of the gold rush days. It goes like this: “There’s gold in them ‘thar hills!” It has become a metaphor to mean that something looks plain and assuming but contains something of value.

Though gold is a precious metal with a brilliant shine when polished, as an investment it has lost some luster for people, but not for the reasons you might think. The Wall Street vests made buying stocks the sexier thing to do and trading currencies became the intellectual investment strategy. In the meantime, gold has quietly risen steadily over the last 8 years until it now sits at over $800 per troy ounce.

The metal itself may be brilliant, but as an investment it is a solid portfolio addition because it is stable. The stock market can’t make that claim. It would be lying if it did.

If you want to talk about market instability, then just pick up a business newspaper and read the headlines.

Stable economies? Obviously not! In fact, even if the equity markets began to take on a semblance of stability it will take many months, if not years, before the full implications of the economic crisis play out. Here are some possible future headlines in a newspaper printed during 2009.

· US Treasury Department Unable to Sell Enough Securities to Cover National Debt
· Inflationary Pressures Continue to Rise
· How Will the Euro Zone Restore Confidence in the Euro?
· Major Financial Group Files Bankruptcy

Businesses come and go and so do their profits and asset value. But when you are buying gold bullion or you buy US gold coins, you are buying a level of portfolio stability you could not find anywhere else. Gold and silver are precious metals and a gold investment in particular has proven itself to be a hedge against instability in other markets.

Declining US Dollar?

You can find plenty of analysts and economists right now who are projecting the US dollar will decline in value when paired with other major global currencies by the end of 2009. The main premise of this prediction is the fact the US will have to raise enormous amounts of funds to cover a trillion dollar national debt. The big question is whether there will be problems accomplishing this goal…especially considering the benchmark interest rate is at 0%.

Gold investing can take a couple of forms. You can buy bullion or gold coins. But why should you? You should include gold in your portfolio because it is a great hedge against the possibility of a weakening US dollar and an unstable world economy.

Many investments are tied to the value of the US currency. For example, when the US dollar weakens investors turn to higher yielding assets which may lie in bonds or stocks. But gold has value in and of itself. The US dollar can fall or weaken, and the gold will still have value as a precious metal. When the demand for gold investing rises, the value of gold rises. So the dollar can weaken while the price of gold remains stable or rises which protects your investment portfolio against some of the losses you would have experienced otherwise.

Will the US dollar weaken when paired with a currency like the yen? It probably will, because there is still so much economic uncertainty in the financial marketplace. What this means is that the price of gold is expected to rise in 2009 as investors seek safe havens for investing. It will be the investment that can be made which will offset inflation and the loss of profits due to a weakening US dollar.

Selling The Kitchen Sink

You can debate for weeks whether it was a good or bad idea for the US to create so much national debt to bail out private businesses. There are two schools of thought of course.

The first school teaches that too much government intervention is not necessary even during a global crisis, because it leads to government ownership of private assets and excessive debt that may not ever get paid back. That leads to free market interference and many people believe the marketplace will adjust as necessary on its own.

The second school of thought believes governments had no choice but to assume private assets and prevent the collapse of the global banking system.

What is going to be the result of all this money injected in the market? The answer is there will be eventual inflation and a currency devaluation during 2009. You can get gold and silver spot prices and use the information to buy precious metals in order to protect your investment portfolio from the ravages of an uncertain marketplace funded by devaluing currency.

As governments sell more and more debt to pay for the bank bailouts, the dollar is sure to weaken. Money printing never deflates prices…it inflates. Gold reached its highest value in March 2008 at $1,032.70, but has fallen to a current $894.30. But here is the most important point to remember. Gold has risen in price for 8 straight years and is expected to do so again in 2009.

Through thick and thin, good and bad, inflation and stock declines…it’s gold you will find in the smart portfolios.

Danny Burns

April 5, 2009

 

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