Hedging Against Dollar Declines Through Gold

By: Rea Jet

The media, and even the network news shows, have begun reporting the price of gold regularly. For almost 2 decades, between 1980 and 2000, the price of gold was hardly mentioned. There was no interest, and the price was either declining or stagnant.

Since 2001 however, demand in gold has jumped along with 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. Much can be learned by understanding what the rising dollar price of gold means.

The rise in gold prices from $256 per ounce in 2001 to over $1000 today has drawn investors and speculators into the gold market. Though many already have made handsome profits, buying gold per se should not be touted as a good investment. Considering that gold earns no interest and its quality never changes. It’s static, and does not grow as proper 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 crucial 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 constitute as an investment. There’s a large descrepancy between the two however, since 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.

Buying gold is hedge or insurance against government’s likehood 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 goes down in value. In our present situation, that means the U.S. dollar is weakening against gold.

One of the characteristics of commodity money (one that originated organically in business) is that it serves 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 a no-brainer when the paper currency is being devalued. It’s smarter 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 a problem once people figure out the purchasing power of their currency is declining quicker 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 a portion of of your savings into gold bullion or even gold-backed securities like the Gold ETF. Investment Advisors advocate that everyone hold 5-15% of their money in gold, although with the present market environment, I'd absolutely go for the high end of that range.

I especially like collectible and rare coins instead of ordinary 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 Era Gold Coins

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

The author hosts a site dedicated to Investing & Passive Income and is an avid Collector of Rare Gold Coins.

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