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In 1974, the right to own physical bullion was restored to the American people by President Gerald Ford’s executive order 11825.
Due to recent economic events—in particular, the recent downgrade of America’s credit rating and the debt ceiling debacle—investors are scrambling to swap other types of investments for bullion products such as gold.
However, is gold a good investment? In my opinion, yes it is. The top reason for me is that the value of gold does not depreciate even when the value of fiat currency does.
It is a secure asset that is easily converted to cash and performs well across the board. If you opt for a physical gold product such as gold coins or bars rather than gold stocks or ETF's, you have better liquidity, but all bullion products are easily liquidated.
Now, there is a caveat in this. There is little risk in holding bars or coins because they are held in physical form either by the owner or by a storage facility on the owner's behalf. However, other gold investments such as gold futures or exchange traded funds (ETFs) are typically held in the form of a certificate (paper) issued by a third-party. If the issuing party goes broke, guess who just lost their investment?
That’s my opinion on investing in gold products, but what do the experts say? Let's examine three perspectives on this topic and discuss other reasons why gold is a popular investment vehicle.
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Gold as a Recessionary Investment
If you are interested in investing in gold, get to know David Morgan, who is a well-known expert and consultant on precious metals. He publishes The Morgan Report On Metals and is a featured gold analyst for TheStreet.com.
Here's what he had to share in a recent phone interview:
Bright Hub (BH): Why do you consider it to be the best recession investment?
David Morgan (DM): Gold was proven the best recession investment under a study done by Dr. Roy W. Jastram. In The Golden Constant, he showed that gold actually does best in a deflation not inflation. What we know from history is gold is an excellent investment in deflationary or recessionary times.
What Jastram found is gold’s purchasing power increases in real terms and we are finding that to be true as well. A quick example that everyone can understand easily is that if you looked at the Dow Jones Industrial Average (DJIA) in terms of gold what you’d find is the Dow is going down. In other words, it takes fewer ounces of gold to buy the DJIA than it took to buy it 10 years ago.
You are measuring the goods and services you could buy with gold. In real terms, you are actually increasing your purchasing power as housing prices are deflating, the Dow Jones is deflating and all these assets are going down in price. Gold increases your purchasing power. So that’s the idea, gold’s purchasing power is increasing while you are having a recessionary environment with housing and the stock market.
BH: What portion of their investment portfolio do you suggest that they hold in gold or other bullion products?
DM: For most people, 10% is enough. If you are super concerned, you could go to 20-25 %. I’m not advocating that anyone put all their money in precious metals.
BH: Would you explain immediate versus future delivery?
DM: Well, it’s pretty self-explanatory. Immediate delivery is also called spot market or over the counter (OTC) market, which if you can picture walking up to a bar and buying a drink, that’s an example of OTC. So OTC or spot market is when you go into a dealer, whether that happens to be the small coin dealer on the corner to the COMEX itself at the Chicago Mercantile Exchange, you plunk down cash that day and you immediately get delivery of your silver or gold. So it’s a cash transaction that takes place in the moment or immediately.
Future delivery is based on a contract made between two parties or two entities to deliver a certain amount of metal at a certain price at a certain time in the future. That’s all it is.
BH: What other types of bullion products are trending?
DM: All the metals are trending up in the long term. Gold is leading right now but from the beginning of the bull market (roughly 2000 to the present), the major overall trend has been up and that trend continues to be up.
BH: Is this a “fever”? When will it break?
DM: There’s no fever like gold fever. What we are seeing right now is what I would consider to be a mini fever that is definitely grabbing the attention of all kinds of individuals, but this is not the gold fever that I expect to see within the next few years. I think, and I could be wrong, that the financial system is reaching the point of no return, and there will be even greater interest in gold a couple of years from now. To me, this is a precursor of the really huge gold fever we will see. I think gold could double over the next three years or so.
BH: What is the risk versus reward?
DM: The downside of gold is that it does not pay interest. Like any investment you can name, the price fluctuates so that’s really no better or worse from that aspect, but the drawback is when you put your money to work, most people want to put it where it will earn interest and gold doesn’t pay interest.
However, although gold doesn’t pay interest, since interest rates are so low it really doesn’t matter that much. Clients say, "Do I choose gold that doesn’t pay interest or do I choose paper money with an interest rate that is so ridiculously low that it really doesn’t matter?"
The interest is probably going to be eaten up by inflation anyway. Gold is performing much better than the dollar so there’s a lot of movement from what traditionally might be money in interest to gold.
BH: Are most people investing in physical gold?
DM: Generally, retail investors are buying physical gold (coins) and professional investors invest across the board in all kinds of gold products.
BH: What are some of the pros and cons of owning physical gold?
DM: One of the cons is gold is a high unit worth; one gold coin is almost $2,000 so with anything that valuable and fairly small there could be concerns about loss or theft.
The pro is gold is recognized as money anywhere in the world so it is the most liquid asset you can own because it is easily transacted anywhere. You can’t sell a share of Boeing stock in India but you can easily take a gold coin and basically do almost any kind of business with it very easily. That holds true for China, Taiwan or any place you would care to name. With most other investments, you need to have a middleman in between you and the final seller.
BH: Money News reported on May 27, 2011 that Utah is currently accepting gold and silver coins as legal tender, while South Carolina is considering legislation to make precious metals legal tender in their state as well. Minnesota, North Carolina and Idaho are looking at the Utah law as their model and experts are predicting that more states may follow suit as faith in fiat currency with no backing dwindles.
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Governments Can't Print Gold
In an email interview, Jon Hunt of Bullion Supermarket had this to say about why investing in gold makes sense: "The rationale for buying gold in recessions has traditionally been that recessions make for interest rates lower than inflation, which means the purchasing power of your cash in the bank is falling. Even though gold doesn't pay interest or dividends, because gold historically keeps up with inflation it makes for a sensible diversification."
“Currently, gold makes even more sense because of the sheer scale of currency debasement taking place in western economies. Put simply, you can't print gold."
Hunt makes a valid point: governments can't print gold so reverting back to a fiat currency system backed by gold would force them to control spending and restrict their ability to borrow. The dollar would regain its value and the overall economy would be strengthened. One expert, Steve Forbes (published of Forbes Magazine) is predicting that the United States will go back to the gold standard within the next five years.
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Gold Is Real Money - Paper Currency Isn't
Byron King, senior energy and mining analyst for Agora Financial, explained to us by e-mail why gold is gaining popularity over many other types of investments especially in the current troubled market.
"Standard & Poor's isn't going to downgrade gold. Still, if you own gold... well, one glance at the chart tells you exactly, and to the penny, what you own."
King went on to explain how the inherent value of gold makes it easy to determine your net worth and ignore market fluctuations like rising gas and food prices or risks of job or housing losses.
As we mentioned earlier, gold increases one's purchasing power, thus shielding individuals from the economic fluctuations caused by fiat currency depreciation. It is a finite resource and unaffected by governmental manipulations. Owning gold is the best hedge against future market collapses, further credit rating downgrades or the demise of the American dollar.
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Looking to the Future
In a recent article in Money News, Robert Wiedemer discusses five reasons why the Federal Reserve's insistence on a zero interest rate and the weakness of the stock market is causing investors to be extremely wary of where and how they invest. Gold is a safe answer to the conditions such as out of control government spending both here and abroad, lack of economic growth, weak housing markets and so forth that he enumerates.
Run out of money? No problem if you are the federal government. You just print more money and continue your spending spree. The problem with this scenario is the law of supply and demand. The more money you print the less value it has because the supply is greater than the demand.
While there is no limit to the amount of fiat currency governments can print, gold is a finite product that the government cannot create at will. There is only so much gold to go around, so while the price of the dollar continues to fall, the price of gold is soaring to record highs.
Decades of poor political judgments like raising the debt limit instead of reining in spending and lowering the interest rate to zero have resulted in paper currency being regarded as virtually worthless and other investment products such as T-bills and stocks becoming devalued as a result. A good fix for this problem is to add more muscle to your retirement portfolio by including gold as a part of your overall investment strategy.
For more tips and advice, be sure to check out Bright Hub's Guide to Investing in Precious Metals.
- Wiedemer, Robert, "Five Reasons for the Stock Market Crash and Zero Interest Rate," Money News, http://www.moneynews.com/StreetTalk/Stock-Market-Interest-Rate/2011/08/11/id/406976
- Image courtesy of David Morgan
- Jones, Forrest, "Gold, Silver Becoming Legal Currency in More States," Money News, http://www.moneynews.com/StreetTalk/Gold-Silver-Legal-Currency/2011/05/27/id/398039
- Image: Oliver Cromwell gold coin by Safforest under GFDL/CC-by-SA 3.0
- Hemmerling, Kurtis, "How to Invest in Gold - Stocks, Bonds and Futures," Money Crashers, http://www.moneycrashers.com/how-to-invest-in-gold-stocks-funds-bullion/
- Author unknown, "Reasons You Should Own Gold Bars," Bullion Supermarket, http://bullionsupermarket.com/bullion-resources/reasons-why-you-should-own-gold-bars-020409.aspx
- Email statement, Bryon King, senior energy and mining analyst for Agora Financial, August 6, 2011
- Email interview, Jon Hunt of BullionSupermarket.com, August 6, 2011
- World Gold Council, "Investment: Glossary," http://www.gold.org/investment/why_how_and_where/glossary/
- Jones, Forrest, "Steve Forbes: Gold Standard to Return in Five Years," Money News, http://www.moneynews.com/Headline/Steve-Forbes-Gold-Standard/2011/05/11/id/395949
- Telephone interview, David Morgan, 08/11/2011, recognized industry analyst in the precious metals market and consultant for hedge funds, high net worth investors, mining companies, depositories and bullion dealers. In addition to publishing The Morgan Report (www.silver-investor.com) on money, metals and mining, he is the author of “Get the Skinny On Silver Investing” (Morgan James Publishing, 2009), and a featured speaker at investment conferences in North America, Europe and Asia.
- Image courtesty of Bryon King