By Michele Steinberg, FinanceGrrl
Photo: Dani Simmonds
In these strenuous economic times, it could be advantageous for savers and investors to take another look at gold. A brief primer on the gold standard:
• The Coinage Act of 1792 established one United States Dollar as consisting of 371.25 grains of pure silver, but was soon after replaced with a gold dollar consisting of 25.8 grains of gold.
• From 1900 – 1933, after the passing of the Gold Standard Act of 1900, gold was coined by the US Mint, and our paper currency was tied to the amount of gold held in the US Treasury reserves.
• In 1933, as response to the Great Depression, Franklin Roosevelt required all people exchange their gold coins for money that was not redeemable in precious metals. Gold was taken out of circulation and kept by the government in the form of bullion.
• In 1971 Richard Nixon signed a policy that took the US dollar off the gold standard in its entirety.
The simplest result of the loss of the gold standard is that when the dollar is weak, gold is strong. As it stands today 1 Troy ounce of gold is worth well over $800 – closer to $900. That’s bad for the dollar, but good for gold.
Why should you invest in gold?
1. Supply is low and demand is high
In September of 2008 the US Mint ‘temporarily’ suspended sales of one-ounce American Buffalo Gold Coins, confirming that “demand has exceeded supply.” Kitco.com of Toronto has been forced to stop selling “until further notice” one- and ten-ounce Gold Bars.
There are currently somewhere between 120,000 and 140,000 tonnes of gold ‘above ground’ in the world. About 30,000 tonnes of the world’s gold [20-25% of above ground inventory] is held in central bank vaults belonging primarily to the USA, Germany, IMF, France, Switzerland and Italy.
Gold is difficult to find in commercial quantities. Gold mining takes a long time (between five and ten years) which presents a struggle for supply to keep up with demand.
2. The risks are comparatively low
Ownership of physical gold has no need for the FDIC. Keep it in a safe, secure location and if (God forbid) all the banks in the country fail, you have no need to worry about your investment in gold.
Compared to bonds gold has no risk of non-payments; or compared to stock there is no risk of a company going out of business.
3. It has real value
Gold can be purchased in mutual funds and exchange traded funds that invest in bullion, such as Central Fund of Canada (CEF) or it can be purchased in the form of actual coins. Coins are an interesting investment as they have an intrinsic numismatic value for collectors as well.
A recent poll of the London Bullion Market Association resulted in an estimate of gold prices increasing to $1,200 in 2009. If you have extra funds to diversify your portfolio, now could be a great time to get into gold.
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October 10th, 2008 at 8:59 am
What do you think the ceiling price on gold is – given the current economic conditions? $1000? $1500?
October 10th, 2008 at 12:15 pm
This is probably the worst financial advice you could ever give someone.
The price people will pay for gold has barely kept up with inflation over time. It’s not an investment – it’s a dumb decision.
Gold has absolutely no intrinsic value. It only has the value that someone will pay for it. You can’t eat gold. You can’t drive gold to work. You can’t live in gold.
So (although its unlikely to happen), if people stop wanting gold, you’re stuck with a bunch of tulips.
See: http://en.wikipedia.org/wiki/Tulip_mania
October 10th, 2008 at 2:42 pm
Junger:
If you had purchased gold coins at around $500 per ounce in 2006, you could sell those coins today for over $800 per ounce. That’s a tidy profit, and FAR exceeds inflation. In the near-term gold is a solid investment.
While it’s true that gold only has the value that someone will pay for it, the same can be said for ALL goods in the free market, from cars (brand new Hummer anyone?) to toys to dot.com stocks. Gold coins have value for the gold with which they are made, as well as value for coin collectors. Gold is also a commodity that can, and is, used to make jewelry and other adornments.
The argument for investing in gold is that it is recognized world-wide as a valuable commodity that can be traded for cash; which you can then use to buy something to drive you to work, or somewhere in which to live.
If you are looking to grow your investments during these weak US dollar times, gold is still a great way to diversify.
October 10th, 2008 at 5:10 pm
1) You could substitute that statement for real estate 5 years ago. Where did that get you?
2) The difference between gold and a Hummer is that a car has a use beyond its monetary value. See above: you can’t eat gold or drive it to work.
October 12th, 2008 at 8:36 pm
Fgrrl, don’t sweat junger – he’s just link baiting you to promote his own site.
Saying that gold has no intrinsic value is just wrong. It has numismatic value, it’s used in electronics and industrial processes and let’s not forget all the jewelry people have been making for the past 4000 years.
October 12th, 2008 at 8:56 pm
haha… junger you’ve missed the plot entirely. In you’re view, currency has no intrinsic value either.
You’re not talking about an investment anymore. Driving you’re hummer to work depreciates its value. So it’s worth is not be assessed in relation to it’s true return on investment which I would imagine would be modest in comparison to precious metals.
According to you, the best investment right now is a tool set.
October 12th, 2008 at 9:23 pm
Gold has no intrinsic value?
What planet do you live on?
Gold and Silver have been used for centuries as currency throughout the world. Our current fiat money (look up the word fiat) is supposed to be backed by gold. Unfortunately, our Congress has abandoned their responsiblities and allowed our fiat curency (through our useless Federal Reserve system) to become practically worthless. Ben Bernanke has stated that he would drop dollars from helicopters to try to keep our economy going. How much value would you give to dollars in that situation. We are rapidly dropping dollars – trillions at a time – the US dollar is becoming worthless.
Gold and silver are probably the very best investment you could make during this current financial panic. If you knew anything at all about economics you would understand this. Obviously you do not.
October 12th, 2008 at 9:46 pm
Just a little further reinforcement of Finance Girls advice: (Maybe the Germans have been reading Geezeo)
http://www.dw-world.de/dw/article/0%2C2144%2C3698865%2C00.html
Investment | 08.10.2008
Germans Stockpiling Gold Amid Market Panic
Bars of gold
Großansicht des Bildes mit der Bildunterschrift:
Gold dealers can’t keep up with the demand
German gold dealers have stopped taking new orders for the precious metal as demand has skyrocketed. Gold is seen as a safe investment during the market turmoil.
In uncertain economic times, Germans are dumping stocks and shares to take refuge in precious metal, accoring to a Wednesday article in a Berlin newspaper.
German gold dealers report running low on stocks of gold bars and coins.
Heiko Ganss, head of the Berlin branch of gold merchant Pro Aurum, told the Berliner Zeitung newspaper that most gold traders were refusing new orders, as they couldn’t meet the current demand.
“Demand is running well above our capacity to supply,” he was quoted saying, saying retail banks in Germany were also unable to meet demand.
“Exploding demand”
Gold traded in London at $913 (656 euros) per troy ounce on Wednesday morning, up from $876.75 late Tuesday.
“Demand has exploded in the past few days,” said Stephan Henkel, a gold broker at Umicore, which presses gold bars and coins and puts them on sale. Delivery times were running at two to four weeks.
“Currently, demand is about 10 times what it is at normal times,” he said.
October 13th, 2008 at 2:01 pm
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October 16th, 2008 at 5:31 pm
@fuel9000
You just made my argument. It has no intrinsic value, only what people will pay for it.
@av
The best investment right now is stocks, like it always is. You should just be holding on to them for the long run, not wasting your money trying to time the market.
PS – it’s “your” not “you’re” and “it’s” means “it is” not “belonging to it”
@gb
What planet do you live on? Look up the word intrinsic and tell me on what planet it means anything relating to how much cash someone will give you for it.
November 1st, 2008 at 3:59 am
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April 7th, 2009 at 10:56 pm
Junger, you are an @ss.
Dow Jones:
Oct. 16, 2008: 8,979.26
April 7, 2008: 7,789.56
- 1,189.7
Gold:
Oct. 16, 2008: $US 805.00
April 7, 2008: $US 882.00
+ $US 77.00
So tell me again how the best investment on October 16th (like always) was in stocks. Which stock was that exactly? CITI? GE? GM?
I clicked your name and read the rant on your blog about the irresponsible financial media. You should stfu all around.
April 7th, 2009 at 11:11 pm
I suck too. The second set of figures was from April 7, 2009 – not 2008.