Is Gold Your Best Defense Against Inflation And Devalued Dollar

August 31st, 2014

The Weakening Dollar

The biggest threat to United States is rising inflation and a devalued currency. The American dollar is the reserve currency of the world, which means all transactions taking place internationally, happens with the use of dollars. It also means our country can print money whenever the demand arises. However, this unique status has not been a boon, and the U.S. has incurred a massive national debt, which is far beyond its means to repay. The only thing that is keeping the country from going to a level worse than Greece is the reserve status of dollar currency.

dollar on fire

Now, even the reserve status of the U.S. currency is at risk, as other countries, especially China, want all its contracts with U.S. changed to the Yuan. Other countries also, who had built huge reserves of the dollar due to its reserve status, have now started to dump it. Secondly, there are also talks about replacing the Bretton Woods agreement, which will dethrone the dollar. Another major concern is that the Federal Reserve Board might start reducing its massive stash of Treasury bonds. If this happens, everyone will start to dump the currency, and it will be devalued permanently.

Inflation is Outdated

This is not something to be happy about, as experts feel the new situation is hyperinflation. The Bureau of Labor Statistics measures inflation in the U.S. This index is calculated by taking into account the price increase of certain goods, and is reported as percentage increase of CPI (Consumer Price Index) annually. However, the goods that are considered may not correspond with the common goods and services that an individual might consume, so there is always certain disparity between CPI, and the inflation’s level people actually experience, which is usually more.

gold coins

This is a reality and we are inching closer to hyperinflation, due to lack of a strong fiscal policy and inability of the government to keep the currency from being devalued. In such a situation, what steps can you take to protect your assets or wealth?

Gold could be a good Defense against Hyperinflation

Many experts have debated about the various ways you could protect your wealth when a rise in prices seem to be spiraling out of control, and the majority believe gold to be a good defense for hedging inflation. One major argument in favor of this precious metal is that it has stood the test of time. Since ancient times, this metal has been some form of currency, and the most preferred object for exchanging for product or services. The main reason behind this is that the yellow metal seems to maintain its value.

gold coins

While currencies have a tendency to fluctuate in value and devalue with time, gold has always maintained its value and even appreciated. In this regard, it is important to understand the concept of value compared to the rate. To provide a basic example, suppose you were able to purchase ten bags of wheat for a certain quantity of gold, ten years ago. You will be able to purchase the same ten wheat bags now, for the same quantity of yellow metal. This means the value has remained constant, even though its rate would have fluctuated. In most instances, you can even expect to buy more products since the value of this precious metal would have appreciated. Hence, even if it is facing a bull run or a bear run, the rate does not matter much, as you are more concerned with its value, when you are planning to hedge inflation.

Secondly, almost all countries focus on building their gold reserves, as the metal is universally accepted as the preferred means of exchange. This means, even though U.S. dollar is the accepted currency, you can easily exchange the yellow metal for almost any goods or services that you may require. Even if a direct exchange is not possible, it can always be sold easily, and the money can be used for purchasing the required commodities or services. Therefore, it makes more sense to maintain gold reserves as your wealth, rather than any currency, which inherently has the characteristic of being devalued at some time or other.

gold bars

Lastly, gold can be bought in very small quantities as well, since coins weighing one and two grams are available easily in the market. This means you can keep buying whenever you have saved some money, and you do not have to wait until you have made enough to purchase a standard bar. Additionally, you need not wait for the prices of this precious metal to come down, as you are more concerned with its value as a defense against inflation.

Precious Metals Investing Tips

July 15th, 2014

Much has been said about the merits of investing in gold. However, other metals such as silver as well as commodities can offer similar returns if invested properly. While some prominent investors do not support diversification, investing in different types of assets or financial instruments is a sure way to hedge your holdings against the volatility of the market.

Why Invest in Precious Metals?

Metals are the best store of value. They are the oldest and most widely accepted medium of exchange all over the world. Their value always increases with time, unlike currency, stocks and several other types of investments. They are therefore the best investment in the modern economy.

Currency is devalued year to year at the sole discretion of the government. This factor, combined with the increasing cost of living, means that your money will be worth much less than it is today even if it earns compound interest over a period of time. Hedging your funds by purchasing precious metals is therefore recommended.

Many countries have taken their currency off the Gold Standard. In the U.S., for instance, this standard was abandoned in 1971. What this meant was that the Federal Reserve could print as much money as it wanted without having to put any gold in its reserves.

Several countries around the world have been rushing to accumulate precious metals regardless of the price. For instance, China has been buying any gold that is offered in the open market. India has been doing the same. The latter is purchasing the precious metal mainly to make jewelry. Brazil has also been purchasing huge amounts of gold in the recent years.

If you take a look at the portfolios of the most successful investors in the world, you will notice that a significant portion of their wealth is held in certain metals. That said, putting some of your money in metals is a wise decision because the demand for this commodity is on the rise, but the supply has not changed. Therefore, their value will continue to increase.

Precious metals are used in the electronics manufacturing industry. It is also used to make jewelry. Therefore, their demand as well as prices will continue to increase in the future.

How to Invest in Metals

There are generally three ways of investing in precious metals. Firstly, you can purchase physical metal and store it in a secure storage facility. Secondly, you can invest in gold-backed ETFs. Thirdly, you can purchase the stocks of companies that deal in precious metals such as miners, processors and custodians. Whichever option you choose, you can be assured of getting good returns.

Investing in Commodities

In the agricultural, manufacturing, processing, pharmaceutical and oil industries, certain commodities are in great demand. These include crude oil, coffee beans, soya, cocoa, wheat, natural gas, silver, corn and cattle. Since demand, supply and other economic factors may affect the prices of these commodities in the future, institutional and commercial users usually take a position to protect themselves from losses arising from price fluctuations. This is usually done through a futures contract.

A futures contract involves the seller and a willing buyer. The contract has a term after which each party must fulfill their obligations as specified in the contract. To start trading in futures, you must first open a brokerage account with a broker who deals with commodities and futures. You also need to fund your account before you start taking any position. In the futures market, there are also financial derivatives that you can trade in. For instance, you may be interested in options trading.

Benefits of Investing in Commodities

There are many benefits of putting your money in commodities. The following are just a few of them.

- Commodities investing offers greater returns compared to stocks, bonds and mutual funds among other financial securities.
- Leverage allows you to multiply your profits if you take the right position
- When taking a position, you can easily go short or long
- Take advantage of price fluctuations of actual commodities

While trading in stocks, buying bonds and putting your money in mutual funds may provide decent returns, commodities and precious metals provide greater returns. In the United States, taxpayers who are saving for retirement are allowed to operate self directed, gold-backed Individual Retirement Accounts (IRAs). This is partly because the legislators, financial experts and retirees have come to realize the traditional investment plans do not offer the expected returns or safeguards from market volatility.

These are just some of the reasons why precious metals and commodities are a good investment.