Gold - Hedging Against U.S. Dollar Devaluation  

Gold - Hedging Against U.S. Dollar Devaluation

The financial media, and even the network news shows, have started reporting the price of gold regularly. For almost 2 decades, between 1980 and 2000, the bullion price was rarely mentioned. There was almost 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 well over $1000 an ounce, a lot more people are becoming interested in investing in gold and an economic indicator. Much can be learned by understanding what the rising dollar price of gold means.

The rise in bullion prices from under $300 per ounce in 2001 to over $1000 today has drawn investors and speculators into the precious metals market. Though many already have made tremendous profits, 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 grow 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 mattress, 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 large descrepancy between the two however, since by holding paper money one always loses purchasing power. The purchasing power of commodity money, i.e. gold, however, escalates if the government devalues the circulating fiat currency.

Buying gold is protection or insurance against government’s ideal to debase its currency. The purchasing 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 large difference, the incentive and wisdom of holding emergency funds in the form of gold becomes smarter when the official currency is being devalued. It’s better than trying to save wealth in the form of a fiat currency, even when getting 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 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 part of your savings into gold bullion or perhaps gold-backed securities like the Gold ETF. Some financial planners recommend that their clients hold 5-15% of their investments in gold, although with the current economic environment, I'd certainly aim for the top 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. That's why I prefer old and rare gold coins, which don't really have a high premium right now. My favorites are the French Lucky Angels Gold Coins

The writer hosts a site dedicated to Investing & Passive Income and is an avid Napoleon Era Gold Coins.

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