The Top Reasons To Buy Gold
Imagine a tennis court.
Now, imagine a cube with sides that are slightly shorter than the length of a tennis court. No, this isn’t some sort of New Age meditation. This is, in fact, a way to visualize all the gold that has ever been mined since the beginning of time.
Most people are shocked to discover the relatively small amount of gold that exists above ground. Indeed, if all that gold was evenly divided between each person on Earth, each individual would only be entitled to a mere 23 grams.
Let’s examine some of the best reasons to purchase this rare chemical element that has captivated humans for thousands of years.
The Economy Hedge
You don’t need to be a financial expert to know that we are currently at the brink of a recession that is bringing the world to its knees. The U.S. debt-ceiling debacle led to the country’s first-ever credit downgrade, while smaller countries like Greece have found their debt so unmanageable that their economy is about to enter the Death Star.
Gold is known for being relatively dependable in the darkest of times, with the price of gold still up over 30% in 2011 despite the recent pullback. The S&P 500 meanwhile, is down about 10% and the US dollar continues to be weak.
Reduce Volatility & Protect From Inflation
Financial pundits advise strengthening and stabilizing your portfolio with gold due to its ability to withstand inflation and times of uncertainty. Indeed, in the years since World War II (when inflation has affected the U.S. most severely), the price of gold has risen. Thus, the decision to buy gold can be viewed as something of a shield to protect oneself against the ever-weakening dollar, as well as unforeseen economic crises.
Flexibility
There are a plethora of avenues available for those looking to buy gold, so tailor your purchase to suit your specific needs and comfort level. Purchasing physical gold is of course a time-honored option, while others prefer to invest in gold ETFs such as GLD, gold mining companies or gold mutual funds to avoid the logistics of storing, moving, insuring, etc. There are possibilities for all budgets and levels of financial expertise.
Personally, I find that simply buying GLD and some bling bling rare gold watches are the easiest methods, and the most fun.
Buffering Your Future
You could even consider an IRA backed by gold. Gold IRAs are relatively new, as they only became possible after the Taxpayer Relief Act was passed in 1997. The Act provided a superb option for those looking to reduce the volatility of their portfolio. Indeed, an investment of $12,500 in gold coins 30 years ago would have resulted in a current net worth of approximately $250,000!
Slow Production + High Demand = Higher Gold Price
Production growth is slow and can’t keep up with demand. Gold production increased at the rate of 1.9 percent for the first 90 years of the 20th century, while in the past 20 years, it has grown at a mere 0.7 percent per year. Meanwhile, demand continues to grow worldwide, especially in China and India. Did you know that in Vietnam, gold is their asset class of choice?
With gold’s history of counter-cyclicality coupled with strength during uncertain times, the choice to buy gold has become extremely compelling. The price of gold has come off 12% from its $1,800/oz high, and perhaps you could start owning a tiny piece of that golden, tennis court-sized cube.
2011 Performance Of Gold ETF: GLD
Readers, with the markets tanking, the EuroZone in disarray, a dismal employment market, and the US Fed basically giving up, what are your thoughts about buying gold here?
What do you think about gold’s recent pullback with discussions that people are selling gold to cover margin calls for other commodities?
Regards,
Sam
I own gold and think that this might be a good opportunity to buy some. I doubt that the dollar is getting any stronger. Besides, if it does, that just means that my energy costs decrease and import prices go down.
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I don’t invest on anything other than my personal bank. It is the only investment vehicle I found that is steady and guaranteed.
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Financial Samurai Reply:
September 26th, 2011 at 7:03 pm
Hah! Then you are in the cash is king camp. Sounds good to me. I have about a third of my net worth in cash returning 4% on long dated CDs. The problem is, I don’t know what to do with my new cash now. You?
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I haven’t invested in gold before but I can see the appeal. My friend’s dad bought a bunch of gold coins about 30 years ago and made a nice profit when he finally sold them last year. I don’t think I’d ever bother with physical gold but buying some market exposure is now on my radar.
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Financial Samurai Reply:
September 26th, 2011 at 9:10 am
Wow, 30 years ago! If only I could be the same age as I am now 30 years ago and put everything I have in real estate, gold and other real assets then and never age!
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I’ll buy gold when 1 ounce of gold can turn into more than 1 ounce of gold, or when gold can provide cash flow. That’s pretty much never, so gold isn’t on my plate.
I’d be careful buying into the gold IRA idea; gold IRAs require that you buy gold for numismatic value, which means a proof coin. Proofs have insane premiums to spot. No thanks. Besides, tax-deferred accounts are best left for income-producing assets, which would ordinarily get smashed in a taxable account. Gold isn’t income-producing, so there’s no reason to let it take up space that could be used for another investment that does produce an income. Marketing gimmick?
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Financial Samurai Reply:
September 26th, 2011 at 10:22 am
Some good and fair points. Transaction costs are high. These need to come down, like they need to in real estate. But when they do, prices just go up as they were already baking in the costs.
So much is marketing no doubt.
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HM Reply:
January 26th, 2012 at 12:24 pm
You can invest in an gold IRA and you dont have to buy proofs. Go to my website to learn more information.
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The reasons you gave are all good, but wasn’t the inflation-adjust high for gold (around $2400 in today’s dollars) about 30 years ago? Anyone who bought gold then might be able to put a bigger number on it now but they can’t buy a bigger tennis court with it.
Coincidentally I just wrote a post commenting on an article about price drops that still leave something at an expensive level. The chart seems to show that anyone buying before August would be better off than they would today.
If you could use gold to buy (or build) a time machine and then go back to 2000 and buy some really cheap gold you would be doing well :)
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Financial Samurai Reply:
September 26th, 2011 at 7:04 pm
Not sure, but inflation-adjusted pricing is always a little tricky. All I know is that I thought gold was a sell at $1,300 and it went to $1,850, and now I’m wondering whether it is a buy at $1,580! Who knows really. Commodities should go up over the long run as supply is limited.
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Value Indexer Reply:
September 27th, 2011 at 7:33 am
What changed your opinion?
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Financial Samurai Reply:
September 27th, 2011 at 7:38 am
Political disaster and an economic slowdown did.
I wish I had more gold! I was up in Fairbanks about 2 months ago and visited a gold mine (The Eldorado Gold Mine), you have to visit that place if you are ever up in Alaska. Anyways they give you a tour of old gold mines and how they used to do it. Then they show you their mining system and how they find gold. Then they give you a bag of dirt and let you go ‘pan’ for gold yourself. Everyone who leaves that place finds gold! Of course my wife and I together had about 32 grams and they said at today’s price (this was back in early August), that it would have been worth about $40.
I am surprised that all the gold divided between everyone on earth would only equal 23 grams?! That’s not much at all!
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Financial Samurai Reply:
September 26th, 2011 at 7:04 pm
Oh yeah? That sounds like a lot of fun! I wanna find me some gold as well!
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Ben @ BankAim Reply:
September 26th, 2011 at 9:26 pm
Yeah! They make it seem so easy and the system they have is sweet! But then they tell you how many people have tried and failed with mining and it seems the odds are heavily stacked against anyone. Look on google, you’ll find a bunch of gold mines for sale in Alaska ;) You can start anytime.
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When investing in physical gold, which is better to buy? Gold coins or gold bullion? Is there any difference in terms of which one holds up value better?
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Financial Samurai Reply:
September 26th, 2011 at 7:05 pm
I don’t know if there’s a difference. Bullions are simply in higher denominations. Perhaps it’s like what appreciates more, a $1 bill or $100. It’s the same.
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The problem with gold, as I see it, is that the entire potential for appreciation is solely based upon demand of other investors, making it ripe for a speculative bubble. Tulips anyone?
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Financial Samurai Reply:
September 26th, 2011 at 7:06 pm
It’s definitely a speculative asset in the short run. But in the long run, it just seems like a homerun, just like investing in emerging markets in the long run seems like a homerun. The short runs can last a loooong time though…
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I’d say gold does better during times of financial uncertainty and deflation… from 1980 to 2000 god dropped from $800 per OZ to $250, while inflation was going up as well as salaries…
I guess if you have extra money then go ahead and buy gold. Buy in Asia because the transaction costs are very low (spread of less than 1% between buying and selling bars).
But unless you buy low and sell high you have not made a profit.
I really question any statement of someone buying 30 years ago, selling now, and making a profit.
-Mike
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I don’t “get” buying gold. It doesn’t produce anything…you are simply buying it with the hope that someday someone will buy it back from you for more money (maybe that is different if you buy gold bars, but that the premise of the etf).
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When the gold mining companies start hedging their inventory, start looking for a top. Until then gold is a buy.
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never understood it either . . . what is a gold owner going to do with gold when paper money becomes worthless? eat it?
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Financial Samurai Reply:
September 27th, 2011 at 3:04 pm
You barter with it. The exchange value is the essence of all currencies, including gold.
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fairykarma Reply:
September 29th, 2011 at 7:25 pm
Haha. Why would you even stick around if it came to bartering? You’re just asking to be robbed if you’re the dude that pays for his sliced bread with gold nuggets.
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Financial Samurai Reply:
September 29th, 2011 at 7:32 pm
Of course you dont stick around for bartering. This is 2011 not cavern days. It’s the intrinsic value.
Does gold compound? Does it produce anything productive? Or am I just looking for the next bigger fool than me to buy at a higher price? Are people buy golding just because it is going up in price? Fear is running high, yet inflation is near zero. Is Buffett right when he says: “You could take all the gold that’s ever been mined, and it would fill a cube 67 feet in each direction. For what that’s worth at current gold prices, you could buy all — not some — all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils, plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?” Even in the world of fiat currencies is gold investing just a speculation in one class of commodities? Or is it one of the currencies of the Apocalypse– gold, guns and groceries?
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I’m with you, Untemplater. I haven’t bought gold myself, but my own parents sold some not too long ago– but unfortunately it was just before gold became the new black and its value shot through the roof. I know people say that gold has remained pretty stable over the years in its value, but it seems like it is suddenly all the rage to me. I get a little apprehensive when it comes to “trendy” buying. How do we know that gold will still be “in” next year? In five years? What makes everyone so confident in gold?
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Financial Samurai Reply:
September 29th, 2011 at 4:53 pm
The more our politicians blow us up, the stronger gold will be. I think t’s safe to say we will be in political gridlock for a looooong while.
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I also suggest hedging portfolios with volatility ETFs (which go up when the market goes down). you can also trade these short term for a quick profit (if timed correctly by looking at world markets/us news/etc.)
some volatility stocks: VXX, TVIX, VXZ
question for you guys: what do you think about buying high beta stocks for the short-term when the market has been down for 3-4 consecutive days?
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