Advantages to Owning Gold as an Investment

“Gold and economic freedom are inseparable. In the absence of the gold standard,
there is no way to protect savings from confiscation through inflation. Gold stands as
the protector of property rights. If one grasps this, one has no difficulty in
understanding the statists’ antagonism toward the gold standard.”

Alan Greenspan, “Gold and Economic Freedom”,The Objectivist, July 1966.

Throughout the centuries, people have continued to hold gold for different reasons. Below are the reasons to own gold today.

 

Increasing money supply :

Worldwide, economies have struggled and global central banks have responded by using record amounts of stimulus, drastically increasing money supplies.

This has led to declining dollar values, and owning gold can protect against a decline in value of the U.S. dollar.

Gold tends to increase in value in relation to the paper money, since governments often try to “devalue” their currencies in order to promote their exports of goods to other countries.

 

Fiat currencies always fail :

We use “fiat” national currencies which are not backed by anything of value like gold, instead the government just declares that they have value and, as long as the people keep believing, they accept it… But there have been thousands of fiat currencies throughout history, and they have ALL failed.

Since 1971, for the very first time in history, all of the world’s currencies are fiat currencies simultaneously…

 

Price :

Gold is priced near its average cost of product and below its margin cost of production for a significant proportions of its supply.

Adjusted from the real rate of inflation, gold should be much higher to take into account the trillions of dollars that have been printed since 2008. The Dow/Gold ratio is a good indicator of the fact that gold in undervalued.

Fundamental analysis refers to the valuation of gold relative to the other asset classes (stocks, bonds, real estate, and currencies), and each of these analyses suggests that gold is undervalued about 10 times.

Only 1% of world financial assets are in precious metals and that when the rush by fund managers to buy gold starts prices will go parabolic.

 

The ultimate insurance policy :

Throughout the last centuries, most episodes of printing have been followed by periods of inflation or even extreme cases of hyper-inflation, either severely destabilizing the nation’s political stability. Those who capitalized off these unique periods were holders of monetary metals such as gold.

During times of inflation, gold can help in preserving the value of one’s assets.

Like an insurance policy, while the event probability is low, when fire strikes the benefits largely outweigh the cost. At the current gold price level, the cost of insurance is tremendously cheap in relation to the wealth it would conserve if history repeat itself.

 

Gold has maintained its value over the long-term :

Gold is a very good way to “store” or preserve wealth and unlike paper currency or other assets, gold has maintained its value throughout the ages; it was valuable 2,000 years ago, it will remain valuable into the future.

Although the price of gold can be volatile in the short-term, gold has maintained its value over the long-term.

 

Rising geopolitical tensions :

Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often called the “crisis commodity,” because people flee to its relative safety when world tensions rise; during such times, it often outperforms other investments.

 

Gold is increasingly in demand :

Demand for gold increases as people throughout the world buy more jewelry, coins and bars. In many countries, gold is integrated into the culture. India is one of the largest gold-consumers in the world. In China, where gold bars are a traditional form of saving, the demand for gold has been steady.

Gold remains a universal finite currency, held by every central bank of note in the world. And central banks became net buyers of gold in 2009 for the first time since 1988.

 

Gold supply is limited :

The amount of gold in the world is limited. It cannot be printed and the federal government or banks cannot “create it out of thin air” the way they can “credit,” which then becomes legal tender (i.e., money).

 

Large short positions :

To fill the gap between mine supply and demand, Central Bank gold has been mobilized primarily through the leasing mechanism, which facilitated producer hedging and financial speculation. Strong evidence suggests that between 10,000 and 16,000 tons (30-50% of all Central Bank gold) is currently in the market. This is owed to the Central Banks by the bullion banks, which are the counter party in the transactions.

 

Portfolio diversification :

Gold is also an adequate way to diversify your portfolio. The key to diversification is finding investments that are not correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments.

 

End of manipulation :

The manipulation of the gold price moved beyond central bank leasing of gold to bullion dealers in order to create an artificial market supply to absorb demand that otherwise would have pushed gold prices higher. The manipulation consists of the Fed using bullion banks as its agents to sell naked gold shorts in the New York Comex futures market. But that ability to manipulate the gold price is disappearing as physical gold flows from West to East, leaving the West with paper claims to gold that greatly exceed the available supply.

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