Hedging Against Dollar Declines Through Gold

By: Rea Jet

The financial media, and even the network TV shows, have started reporting the price of gold regularly. For almost 20 years, between 1980 and 2000, the gold price was rarely mentioned. There was almost no interest, and the price was either falling or stagnant.

Since 2001 however, interest in gold has soared and so has its price. With the price now over $1000 an ounce, considerably more people are becoming interested in gold as an investment and an economic indicator. A lot can be learned by understanding what the rising dollar price of gold means.

The rise in bullion prices from $256 per ounce in 2001 to over $1000 today has drawn investors and speculators into the precious metals market. Though many already have made tremendous gains, buying gold per se should not be touted as a great investment. Considering that gold earns no interest and its quality never changes. It’s static, and does not increase as ideal investments should.

It’s more precise to say that one might invest in a gold or silver mining company, where management, labor costs, and the nature of new discoveries all play a critical role in determining the quality of the investment and the profits made.

Buying gold and holding it is somewhat similar to converting one’s savings into one hundred dollar bills and hiding them under the bed, althoughtyet not exactly the same. Both gold and dollars are favored as money, and holding money does not qualify as an investment. There’s a big descrepancy between the two however, because by holding paper money one loses purchasing power. The purchasing power of commodity money, i.e. gold, however, goes up if the government devalues the circulating fiat money.

Holding gold is hedge or insurance against government’s tendency to debase its currency. The buying power of gold increases not because it’s a so-called good investment; it increases in value only because the paper currency decreases in value. In our current situation, that means the U.S. dollar is weakening against gold.

One of the characteristics of commodity money (one that came about naturally in the marketplace) is that it must serve as a store of value. Gold and silver meet that test, while, but paper money does not. Because of this major difference, the incentive and wisdom of holding emergency funds in the form of gold becomes attractive when the paper currency is being devalued. It’s better than trying to save wealth in the form of a fiat currency, even when earning some small amount of interest, especially when this interest often attracts the highest taxation rate. The lack of earned interest on gold is not an issue once people figure out the purchasing power of their currency is declining much higher rate than the interest rates they might get. The purchasing power of gold can rise even faster than increases in the cost of living.

It's probably a good idea to make sure you diversify some of your savings into gold coins or perhaps gold-backed securities like the Gold ETF. Investment Advisors recommend that their clients hold 7-15% of their money in gold, although with the present monetary situation, I'd certainly go for the top of that range.

I especially like historical and rare coins instead of regular bullion coins. Historically, the US government has confiscated bullion coins. They do not however confiscate historic or collectible coins. That's why I prefer old and rare gold coins, which don't really have a high premium right now. My favorites are the Napoleon Ist (circa 1800) Gold Coins

Article Source: http://www.find-investment-advice.com

The writer hosts a site dedicated to Living off Passive Income and is an avid Gold and Silver coin collector.

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