There are many reasons to invest in gold. It may seem like an unusual choice, but it has considerable benefits. Let's start with the obvious. Gold is widely recognized and accepted worldwide as a valid form of currency.
Physical gold is valuable enough to be held as an international currency, held most frequently by central banks. Like your family home, which we all know, should never be looked at as an investment; gold bullion ought never to be considered as such, instead a sensible form of financial protection or of long-term savings for a rainy day. But gold is much more than a safe haven. For most investors it is a key ingredient in building a sound and diversified portfolio which should ideally be both diversified across asset classes and highly concentrated in certain strategic areas.
In fact, there are many ways of categorizing assets: safety, income and growth. Gold is definitely in the last category, but not by accident. Its price is highly correlated with that of the economic and financial conditions throughout the world, and this makes it a very good investment as both an inflation hedge and a deflation hedge. Its price has been closely linked to the price of other precious metals for centuries. History is littered with many examples of governments and central banks printing massive amounts of money to finance major projects, only to lose it all in a short time frame. Gold, unlike paper money, is a highly secure and liquid asset.
This is a good thing, of course, because it gives us another tool to fight inflation. Gold prices tend to soar when economies suffer severe recessions, either in the U.S.A. or elsewhere around the world. The logic of this is simple: if paper currency cannot be used to finance major projects (i.e., wars) then the only viable solution is to print more money (gold and silver) and use it as a reserve asset to cover the deficit created by printing too much money.
Now, it is widely accepted that gold stocks are probably not a good way of investing money short-term, either in the U.S.A. or anywhere else. Most professional investors (including people who work for or own investment banks) would advise against buying a bunch of physical gold stocks and holding them overnight in your bank. After all, don't we all have cash that we want to invest? If you are planning on investing for the long term, in particular for the period leading up to and following the upcoming presidential elections, then you might want to consider gold stocks. But before you do that you need to understand a few things about the global economics and political context.
For instance, one of the major arguments advanced against investing in gold (which is also advanced vigorously against investing in shares of another way) is that gold is "worsened" by the global recession. It is claimed that the growing demand for gold as a hedge against inflation means that gold will become more difficult to purchase and will thus lose its value. While it is true that gold has lost some of its premium over the past few years, this has always been occurring as the price of gold has always been fairly stable. In addition, it should be noted that gold dealers actually make their profit when the spot price of gold rises above the price of gold futures contracts. So, whether there is a correlation between the two is up for debate.
Another argument advanced against investing in gold (which is also advanced vigorously against investing in shares of another way) is that there are a limited number of truly independent mining companies active in the market today. Gold, it is argued, is a "fringe" market, with less reliance on the volume of smaller miners which drives the price of gold prices higher. The lack of direct relationships among mining companies and the demand for gold make the exchangeable commodity rather difficult to track. Also, even if there are no direct relationships, there is the risk of monopoly by some companies. Thus, gold price streamlining by streamlining the supply of companies providing the gold required by the public is proposed as a way to increase liquidity and to reduce pricing bias.
With these arguments in mind, there may be some investors who would prefer to invest in gold through actively managed funds as a hedge against inflation or other economic calamities. While it is possible to find actively managed funds that have significant holdings in gold (either directly or indirectly through holding shares in mining companies or through gold futures contracts), it is also very likely that most investors would rather invest in standard funds. As such, if you are an investor interested in learning how to invest in gold smartly, do some research on gold ETFs (or gold mutual funds) before making a commitment.
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