Lately, the instability of the American economy has made many investors nervous, and there's been a lot of speculation about buying gold as a safe alternative to a market that continues to tank. These days, there are many reasons for that nervous feeling.
Devaluation of The Dollar. With taxes cut, and government spending for high ticket items, such as the war in Iraq, continuing to rise, new money gets printed as fast as the presses can roll it out. The US dollar continues to lose its value compared to the Euro, the Yen and the Canadian dollar, as evidenced by the growing number of international tourists coming to the States, taking advantage of the comparatively cheap prices.
Fear of Bank Failures. The Federal Deposit Insurance Corporation (FDIC) is expecting many bank failures in the next few years, due to the imploding housing bubble throughout the country, where too many loans were made, using shaky interest rate mechanisms. The resulting credit crunch will make it harder for people to take out loans, eliminating the biggest moneymaker for these banks.
Rise in Energy Costs. The rise of the cost of a barrel of oil has had far reaching effects on the entire country, from costs of transportation, to costs for animal feed, to heating bills. OPEC countries and Big Oil companies point blaming fingers at each other, with little result.
With the threat of uncertain times ahead, gold takes on the glow of a stable commodity, which will always be able to buy goods and services.
In the newspapers, you'll see ads for companies that want to buy scrap gold, or are selling gold bullion from around the world. It's true that for the past few years gold has been increasing in value, and it probably will for the foreseeable future. However, the ads don't talk about the long periods of time where the market outperformed the price of gold.
The graph below shows that investment in gold is mainly a hedge against inflation and unstable market losses, as opposed to gaining vast amounts of wealth. The green bar in the graph illustrates the relatively stable nature of gold investment, while stocks are subject to stressful highs and lows. On the other hand, stocks are very different from one another, as opposed to the uniformity of gold, and the allure of the stock market is that one might be able to pick and choose successful stocks that buck the market trends. Or you might have bought stocks at a low point, say in the mid-70s, and then rode the economic gravy train through the 80s and 90s. It's always easy to see what one should've done 20 or 30 years ago, but the next step into the future is full of uncertainty
How much an American investor wants to buy into the gold market depends on how long they think the American economy will be on a downward trend, and it's beyond my limited capabilities to predict very far into the future. New political administrations could strive to reverse many of these trends, but their rate of success may not be obvious for some time. One will always have to keep an eye on the overall market trends, to make sure they're not losing out on taking advantage of an upswing in the economy. In any case, keeping a diversified portfolio will still be a good rule of thumb, so no one should be thinking of keeping a gold hoard in their basement.
Ways to Buy Gold.
Exchange-Traded Funds. Exchange-Traded Funds (ETF's) are investing conveyances that hold many companies under one umbrella which are connected by a specific investment commodity. So if you want to get into the gold field, but don't want to invest all of your golden eggs into one particular company, a gold commodity ETF would be a good alternative. With many ETFs, each share represents a certain percentage of an ounce of gold, while others specialize in gold futures.
Buying stocks in Gold Mining Companies. Gold mining companies can be lucrative investments if they hit pay dirt. However, these companies are spread throughout the world, so any investor in particular companies have to deal with the uncertainty of companies outside the United States. There could be government interference, or outright appropriation, or foreign governments could dump their hoarded gold onto the market, which would reduce demand and price.
Buying Coins. Buying bullion is appealing to many people, enjoying the feel and weight of real coins, but there are costs in dealing with the actual metal. One of these would be the broker fees involved in exchanging coins, not to mention storage, security and insurance expenses.
Gold has been a safe place for investors for a long time, and with economic uncertainty prevailing around the globe, it'll stay in demand. Investors wanting to get out of the volatile stock market lately have driven the price of gold upwards. Whether this upward trend will continue or stall is uncertain, so any venture has a risk involved. As with any investment, keep a sharp eye on your money.
