As Good as Gold

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In an article in Smart Money, Jack Hough recently pointed out that we associate gold with wealth and safety only because its chemical properties once made it ideal for making coins by hand. Gold is incredibly malleable, doesn’t corrode, tests easily for purity, is exceedingly rare and has relatively few industrial uses. It’s perfect for just sitting around and representing value. But that value must come from somewhere, and today that value comes primarily from perception, not reality. Today gold value is primarily driven by fashion and speculation, the latter made easier than ever by companies that that hawk investment funds and comemorative coins.

Before you rush out stake your claim, you need to identify the primary reasons behind your desire to join the gold rush of 2009.

COLECTIBLES–If you are looking for a collectible item that you can pass on to future generations, or one that might improve in value due to excess demand for a unique item, then you would be wise to avoid purchasing anything offered online or in a television commercial. Despite their promised 10-coins-per-household minimum, there is in fact an endless supply of these items, and therefore they hold no value in excess of the current price of the gold used to cast it. If you are looking for something with collectible value, go to a reputable dealer of rare coins and spend your money there.
EMERGENCIES–If you subscribe to some of the doomsday scenarious where the modern banking system as we know it implodes and our society is reduced to a barter economy and you think that gold coins will be a convenient mode of trade, unless you want to be caught looking for someone to break a full-ounce coin to purchase your groceries or toilet paper, you would be wise to consider buying tenth ounce coins instead. Inidentally, that is how the term quarter started. The first quarters were literally an ancient Roman coin cut into four pieces to facilitate trade in small denominations. You might be better off spending your money now on things necessary for survival if the financial world really does implode. Food, water, toilet paper, jeans, Advil, toothpaste, and the like. These are items that you and your family will need anyway, and will more than likely be the primary means of trade in any basic barter economy. Who knows, maybe a Snickers bar will have more intrinsic value to soemone who is really hungry than one ounce of gold.

INFLATION–If your desire to buy gold is as a solution against the inevitable inflation lies around the corner, you would be well advised that without any actual value, gold’s price might soar or plunge during inflation, depending entirely on whether people believe or stop believing the continually perpetuated gold myth. Isn’t it better to own the goods you’ll need to live and enjoy life, or at the very least own the companies that make those goods? Along those lines, the best inflation-fighting investments are stocks. Specifically stock in companies that make, sell, and distribute goods and services that people need including food, medicine, oil, and the like. As prices rise, which is what happens in an inflationary environment, the values of these companies will also rise in direct proportio, which will effectively hedge your portfolio against inflation.

So, while precious metals, mining stocks, and yes possibly even some gold is part of a well-balanced wealth management strategy, it is not the only solution out there and should be managed with some wisdom and forethought.

Filed Under: PRecious Metals

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