Tuesday, July 19, 2011

8 Reasons To Own Gold (and Why it's Still a Good Idea)!

Our friends at Investopedia recently shared 8 reasons to own gold . What struck me most when I read the article is how most of the reasons are still true today, even as pundits debate the possibility of a gold bubble.

photo by hto2008

Before I go an further, here are the 8 reasons to own gold:

  1. Gold holds its value
  2. Weakness of the U.S. Dollar
  3. Inflation
  4. Deflation
  5. Geopolitical Uncertainty
  6. Supply Constraints
  7. Increased Demand
  8. Portfolio Diversification

First off, many of these reasons are inter-related. For example, Inflation and Deflation, and Increased Demand and Supply Constraints. Looking at this list it becomes clear that gold is the "go-to" uncertainty play. Not sure if inflation is rising, or we're destined for deflation? Buy gold.

The fact that the price of gold has skyrocketed over the past decade should not be surprising when we consider the 8 reasons above. Since September 11, 2001 we've had terrorism as a very real threat, which produced serious geopolitical uncertainty.

Production of new gold from mines has been on the decline since 2000, and according to BullionVault.com:

"annual gold-mining output fell from 2,573 metric tons in 2000 to 2,444 metric tons in 2007. It can take from five to 10 years to bring a new mine into production."

Then you factor in the financial crisis of 2008, subsequent fears of hyperinflation and deflation, and the federal reserves seemingly hell-bent on destroying the value of the dollar and it's beginning to look a lot like a fundamentals issue rather than a chasing-performance bubble.

All of these uncertainties have led to an increase in demand, which in turn leads to an increase in the price.

I'm no expert, and I used to think gold was just the new dotCom bubble but I admit I underestimated the extent of the mess the folks in Washington D.C. would make of the financial crisis. Greece was never on my radar, much less the extent of socialism in their economy. If it was, I dare say the European "debt crisis" would have been much more obvious since it's only a matter of time before you run out of other people's money, and a credit crunch like the one in 2008 is all that was needed to put the brakes on that gravy train.

It doesn't look like the U.S. is going to take the action needed to fix its spending problem. Greece is likely to get booted from the EU or drag the EU and the Euro down with it. And we're unlikely to see any sort of stable growth economy for a decade or more.

All of that is without the impact of middle east unrest and oil prices, mind you.

It's looking more and more to me like high gold is here to stay, at least for a while more.


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