Why Invest in Gold
Why invest in Gold? Why gold is the ideal hedge against inflation, the banking crisis, a depreciating USD and more.
Historically, the main reason to invest in gold is to preserve value, especially as the national currency devalues or depreciates. Thus, gold investments are a hedge against a depreciating currency.
Unlike other metals, gold is typically produced for accumulation. In contrast, metals such as platinum and silver are usually produced for industrial purposes. Gold is a store of value. In the past, gold was directly used as money.
Why Invest in Gold
The price of gold is highly consistent with the level of inflation. The higher the level of inflation, the higher the price of gold. Thus, capital gains from your gold investments will help offset the effects of inflation.
Why is inflation poised to go up in the US? You know the main reasons all too well: America’s growing trade deficit, lower interest rates, rising oil prices, depreciation of the dollar. Gold prices are highly correlated with oil prices, and indeed tend to lag oil prices.
Depreciating US Dollar
Gold is a dollar-based asset. Since you buy and sell gold with US dollars, the more the US dollar depreciates, the higher the price of gold. Thus, gold is a strong hedge against depreciation.
Gold is a good way to diversify your assets, as it is often negatively correlated with equities and bonds. The ideal asset allocation involves creating a mix of assets that have low to negative correlation with one another.
Declining confidence in banks
As banks are ravaged by the subprime mortgage crisis and confidence in the banks gradually decline, many people are turning away from paper assets. Instead, as a physical asset, gold is a safe hedge. More importantly, gold has even been called the ‘crisis commodity’. In times of economic and social instability, the greater the level of global uncertainty and lack of confidence, the more likely gold will outperform other investments.