If you ask a handful of individuals that are closely tied to the precious metal and bullion industry if gold and silver should be viewed as an investment or insurance, you will likely get very different answers. That’s because buying gold and silver can be viewed with two objectives in mind: as an insurance policy against economic and monetary crises or as an investment with the objective of realizing a real return above and beyond inflation. This means that precious metals offer something that most forms of investment do not: they can simultaneously work to make you money and provide a hedge against certain economic conditions. The truth of the matter is that buying gold and silver are not an investment or insurance; it’s both!
Buying Gold and Silver as a Hedge
Gold and silver have long been recognized for their safe haven attributes, and in fact, are one of the preferred investments under various economic and political crises. Below are just a few situations in which gold and silver have historically outperformed most other asset classes:
- Banking Crises. The last recession showed how vulnerable banks can be to an economic crisis. Had it not been for the TARP bailouts, many banks likely would have gone under.
- Inflation. When the real rates of return in the real estate, bonds and equity markets are negative, many people flock to precious metals as an asset that maintains its value.
- Depreciating Currency. When the Federal Reserve inflates, this drives down the price of the dollar, which tends to move inversely to the price of gold and silver.
- Economic Collapse. While a complete economic collapse is highly unlikely, many individuals believe that gold and silver will be used for bartering purposes in the absence of an accepted currency.
- Political Crisis or war. Upheaval from war and political crisis often causes people to seek a safe haven, which historically been U.S. Treasuries and precious metals. This was evidenced in part earlier this year when it appeared as though the U.S. was on the brink of war with Syria.
Precious Metals as an Investment
The role of gold and silver as a hedge against inflation and economic crises has been proven throughout history, but this doesn’t necessarily mean that gold and silver are only profitable during times of financial uncertainty. In fact, gold and silver also represent an investment opportunity to realize a profit, even during strong economic times.
Case in point is the performance of precious metals over the past dozen years relative to the stock market. While the compounded rate of return in the stock market from 2000 – 2012 was 1.61%, the price of gold increased from $283 an ounce to $1,677, which represents nearly a six-fold increase! While gold is on pace to have its first losing session in a dozen years, the future prospects for the yellow metal appear to be bright, as the Federal Reserve is expected to maintain its current program of bond purchases for the foreseeable future. In fact, Janet Yellen, the newly confirmed Fed Chairman, indicated at her confirmation hearing yesterday that the economy is not yet stable enough to begin tapering http://www.marketwatch.com/story/yellen-faces-questions-on-bubbles-regulation-2013-11-14.
Not only should demand for gold from an investment perspective remain strong in the U.S., but foreign demand for gold is unprecedented, as countries from the Far East are accumulating gold at record levels. In fact, the following article by Mineweb http://www.mineweb.com/mineweb/content/en/mineweb-gold-analysis?oid=217962&sn=Detail indicates that China’s gold reserves may match those of the U.S. in 10 years, if not earlier. Just this year, China is expected to add over 600 tons to its gold holdings, and considering that they haven’t exactly been forthcoming with their official reserves to date, some believe that they may already be half way to reaching the U.S.’s official gold holdings of 8,133.5 tons.
Taking Control of Your Own Investment
While there are many ways to invest in gold and silver, we’re strong proponents of taking physical possession of your gold holdings. Thus far gold and silver ETF’s and mutual funds have been relatively safe; however, there’s a question as to if these funds are fully backed by bullion. Furthermore, using a commodities broker can be hazardous to your financial health, as we saw firsthand with the improprieties carried out by MF Global. Gerald Celente, founder of the Trends Journal, shared with Alex Jones at Infowars his personal experience of losing over $100,000 with MF Global http://www.infowars.com/gerald-celentes-gold-account-was-emptied-by-mf-global/.
Tony Davis is the owner of Atlanta Gold & Coin Buyers, a full service Atlanta based coin and bullion dealer specializing in buying, selling and appraising coins and coin collections of all types and sizes. Visit his website at www.atlantagoldandcoin.com for additional information on the products, services and educational resources offered by his company. Tony can be reached at [email protected] or at 404-236-9744.