For those that haven't already, it's time to Buy Gold

Posted by on 12 October 2012

Despite the fact that many of today’s financiers treat the subject of gold with nothing short of disdain, whatever your level of wealth gold should be a part of your strategy to increase or protect your wealth over the long term future.

Consequently, the following information is with regard to buying and holding gold for the long term (a number of years) and is not a short term trading recommendation as buyers need to be aware that gold is susceptible to significant price moves both up and down especially over the short term. 

The four basic reasons to hold gold are: 

• Gold has proven to be a reliable preserver of wealth.
• As well as protecting wealth its been performing extremely well as an investment for the past decade.
• Gold being treated as real money has been normal practice throughout history and likely to be normal practice in the future.
• And very importantly in the current environment it is insurance against financial crises.

So let’s explore more fully the above reasons to hold gold in your investment portfolio: 

1. Storage of wealth  – a common example given is that in the 1920’s a Wall St executive could buy a high quality men’s business suit for USD35.00 which was also the cost of an ounce of gold at that time. Today a high quality men’s suit for a Wall St executive would cost around USD1700-1800 which is the cost of an ounce of gold in today’s prices.
   I have also read reports that an ounce of gold bought a Roman senator his toga and sandals 2000 years ago but I am not quite sure how to substantiate this claim.
   Despite years of inflation gold has maintained its purchasing power, but the same can certainly not be said for the money in your pocket or saved in the bank.  Over those same years inflation has massively eroded the value of cash – it now takes nearly $1000 to purchase what you got for $100 forty years ago.
2. Gold= Money  – in many past civilizations gold has been used as money. However, gold is totally suitable for this purpose as it is rare, standardized in purity and weight , divisible, and indestructible. The reserve currency of the world the US dollar was taken off the gold standard by President Nixon in 1971 (note that the time since is the same forty year period mentioned above with regard erosion of the value of money) and consequently since 1971 the world’s currencies have been what are known as fiat currencies i.e. paper currencies not based on a relative value to gold.  Prior to 1971 the US dollars convertibility into gold had kept the worlds currencies on a sound footing due to the fact that all currencies were convertible into US dollars and therefore convertible into gold.   
   Throughout history countries and empires have attempted to create a monetary system that is not based on gold and yet all of these fiat monetary systems eventually failed and the paper currency in use went out of existence. There is no reason to believe that this will not be the eventual fate of today’s fiat paper currencies. Therefore it is highly probable that at some point in the not too distant future the world will return to some sort of gold standard i.e. return to normal. If this occurs it is likely that holders of gold would see a significant appreciation of the value of their gold.
3. Gold’s stellar performance as an investment over the past decade. At the turn of the new millennium gold was priced at approx USD $400. Since then it has risen steadily and the average annual return over the past 12 years has been approximately 15%. Gold’s current price is ranging between USD1750-USD1800  and the expectation from many of the large financial institutions is for gold to rise to above USD 2000 during or even prior to 2013.
   Central banks are playing a huge role in this outperformance, according to the World Gold Council central bank purchasing of gold has soared, with the 157.5  metric tons of gold bought by central banks in the second quarter 2012 being an increase of 62.9% from the 1st quarter 2012 and a 137.9% increase on second quarter 2011. And when you consider that prior to this last decade central banks were net sellers of gold they have certainly realised which way the wind is blowing. With central banks, and in particular the Chinese central bank who has become the largest importer of gold, likely to continue this hoarding of gold there is no reason to suspect that this upward trend will not continue for a number of years to come eventually rising above USD5000.
4. Insurance – in times of financial crises assets that are held electronically or on paper can quickly have their value eroded or even disappear in the worst types of crises. Gold being acknowledged as a safe haven makes it an asset to jump into when you are wanting to take your funds out of the financial system and seek the protection of something that is real and everlasting ie Gold.

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