RebelCapitalist: Financial Information for the Rest of Us

Why Gold?

Mar 20, 2009 | By: Mr_Blue | Comments | Permalink | Tags: gold

You may have heard or read about recent advertisements about purchasing and owning gold or you may seen recent TV ads about companies buying gold (Be careful!). This story was prompted by a very interesting story I saw on ABC’s “Good Morning America” about the emergence of cash for gold companies. I strongly suggest people read and listen to that story. Gold is a commodity just like corn, wheat, sugar or oil. But it is a very expensive commodity because it is a precious metal. At the time of this story, gold was selling for $957 per ounce.

Why all the hype about gold? In my opinion, gold dealers and other gold investors seem to get more vocal around downturns in the economy such as the recession we are in today. Maybe they are an economic indicator? They are anticipating some very real economic factors that positively effect the price and demand for gold - declining value of the U.S. dollar and inflation.

Gold is a hedge (a method of limiting investment losses) during times of crisis and a decent inflation hedge. The theory is that gold is something that has concrete value determined by the gold market. As inflation increases, our dollars are worth less meaning it takes a lot more dollars to buy stuff. This means that it would be better to own gold instead of having dollars. But the challenge is that our official currency is the dollar and not gold. So it is not practical to have gold bullion or coins sitting in a vault to sell later for cash to pay for living expenses (although I am sure there is a survivalist somewhere doing this).

Gold serves a very useful purpose in a well diversified investment portfolio. The following are three ways (that I am aware of) to invest in gold:

1) Open an account with a reputable gold broker/deal. Make sure to do your research because I am sure there are plenty of scams in this area. You deposit money into an account and that gold broker/dealer purchases and typically safe keeps your gold. Some gold broker/dealers do not safe keep and will send the gold to the purchaser and purchaser has to make arrangements for storing the gold.

2) Purchase the common stock of a gold mining company such as Barrick Gold Corp (ABX) or Newmont Mining Corp. (NEM).

3) Purchase an Exchange Traded Fund (ETF) (ETFs can be purchased like a typical common stock) that focuses on gold such as SPDR Gold Shares (GLD), iShares COMEX Gold Trust (IAU) or Market Vectors Gold Miners ETF (GDX).

Beware, like most commodities, gold prices can be very volatile and therefore determining the right time to liquidate your gold investments is a matter of careful timing. It is not an investment that you practice “buy and hold” like some stocks.

Good luck.

P.S. This not investment advice but just information.