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What The Price Of Gold Tells You

The financial media, and even the network TV shows, have begun reporting the price of gold regularly. For almost twenty years, between 1980 and 2000, the gold price was almost never mentioned. There was little interest, and the price was either declining or remaining steady. Since 2001 however, demand in gold has jumped and so has its price. With the price now over $1000 an ounce, considerably more people are becoming interested in gold as an investment and an economic indicator. Much can be learned by understanding what the rising dollar price of gold foretells.

The rise in gold prices from under $300 per ounce in 2001 to over $1000 today has drawn investors and speculators into the precious metals market. Though many already have made obscene gains, buying gold per se should not be touted as a great investment. Considering that gold earns no interest and its quality never changes. It’s static, and does not grow as sound investments should. It’s more accurate 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 similar 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 considered money, and holding money does not constitute as an investment. There’s a large descrepancy between the two however, since by holding paper money one usually faces a loss of purchasing power. The purchasing power of commodity money, i.e. gold, however, increases if the government devalues the circulating fiat money.

Buying gold is protection or insurance against government’s proclivity to debase its currency. The buying power of gold goes up not because it’s a so-called good investment; it goes up in value only because the paper currency goes down in value. In our present situation, that means the U.S. dollar is weakening against gold.

One of the characteristics of commodity money (one that came about organically in the marketplace) is that it serves as a store of value. Gold and silver meet that test, while, but paper money does not. Because of this large difference, the incentive and wisdom of holding emergency funds in the form of gold becomes attractive when the paper currenty is being devalued. It’s smarter than trying to save wealth in the form of a fiat currency, even when getting 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 realize the purchasing power of their currency is declining faster 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 a great idea to make sure you diversify a part of your savings into gold coins or maybe gold-backed securities like the Gold ETF. Experts advocate that people hold 5-15% of their investments in gold, although with the current market situation, I'd absolutely aim for the top of that range.

I particularly like collectible and rare coins instead of regular bullion coins. Historically, the US government has confiscated bullion coins. They do not however confiscate historic or collectible coins. That's why I prefer old, rare gold coins, which don't really have a high premium right now.

Article Source: http://www.noviceinvesting.com/Article

The author hosts a site dedicated to Living Off Investments and is an avid Napoleon Era Gold Coins.