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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