Hedging Against Dollar Declines Through Gold

By: Rea Lea Osaka

The financial media, and even the network TV shows, have started reporting the price of gold regularly. For almost twenty years, between 1980 and 2000, the gold price was never mentioned. There was almost no interest, and the price was either declining or stagnant.

Since 2001 however, interest in gold has soared and so has its price. With the price well over $1000 an ounce, a lot 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 foretells.

The rise in gold prices from $250 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. After all, gold earns no interest and its quality never changes. It’s static, and does not grow as good investments should.

It’s more accurate 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 an important 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 always faces a loss of purchasing power. The purchasing power of commodity money, i.e. gold, however, goes up if the government devalues the circulating fiat money.

Hoarding 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 goes down in value. In our current situation, that means the U.S. dollar is lossing value against gold.

One of the characteristics of commodity money (one that originated naturally in business) 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 large 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 smarter than trying to save wealth in the form of a fiat currency, even when earning some nominal interest, especially when this interest often attracts the highest taxation rate. The lack of earned interest on gold is not a problem when people realize the purchasing power of their currency is declining quicker than the interest rates they might earn. The purchasing power of gold can rise even faster than increases in the cost of living.

It's probably an appropriate idea for you to diversify a part of your savings into gold coins or maybe gold-backed securities like the Gold ETF. Investment Advisors advocate that everyone hold 7-15% of their cash in gold, although with the existing monetary situation, I'd absolutely aim for the high end of that range.

I especially like historical 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. For this reason 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 writer hosts a site dedicated to Living Off Investments and is an avid Collector of Rare Gold Coins.

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