Is Now A Good Time To Buy Gold?  

Is Now A Good Time To Buy Gold?

The media, and even the network TV shows, have begun reporting the price of gold regularly. For almost 20 years, between 1980 and 2000, the gold price was almost never mentioned. There was little 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 now over $1000 an ounce, many 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 $256 per ounce in 2001 to over $1000 today has drawn investors and speculators into the gold market. Though many already have made tremendous gains, buying gold per se should not be touted as a great investment. After all, gold earns no interest and its quality never changes. It’s static, and does not grow as sound 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 an important role in determining the quality of the investment and the profits made.

Buying gold and holding it is somewhat analogous 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 count 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.

Keeping gold is hedge or insurance against government’s tendency 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 lossing value against gold.

One of the characteristics of gold-backed 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 severe difference, the incentive and wisdom of holding emergency funds in the form of gold becomes smarter when the fiat money is being devalued. It’s better 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 figure out the purchasing power of their currency is declining much higher rate 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 bullion or even gold-backed securities like the Gold ETF. Investment Advisors recommend that everyone hold 7-15% of their assets in gold, although with the existing economic situation, I'd definitely go for the upper end of that range.

The author hosts a site dedicated to Investing & Passive Income and is an avid gold and silver coin collector.

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