Gold investments have helped investors profit and protect their hard-earned wealth for millennia. The precious metal is considered to be the only form of real money, because when paper currencies fail, they always resort to gold. In the past century, gold has increased in value over 7000%, outperforming nearly every investment in the world. Before we can explore gold investments, we must answer a very basic question.
Investopedia defines an investment as “an asset or item that is purchased with the hope that it will generate income or appreciate in the future.” Suffice to say that this definition clearly applies to gold.
There is more to the definition of investment, however, as there are two senses of the word.
According to Investopedia, economic investment “is the purchase of goods that are not consumed today but are used in the future to create wealth.” Examples of this include funding a new venture, improving infrastructure, and education – things to which we allocate existing wealth in order to ensure the wealth of future generations.
Also according to Investopedia, financial investment “is a monetary asset purchased with the idea that the asset will provide income in the future or appreciate and be sold at a higher price.” The key here is ‘monetary’ – means to create money here and today, with little regard for the future and even less correlation to wealth.
Is insurance an investment? If we come to an untimely death it provides future wealth to our survivors, but if we live it is merely an expense. If our home burns to the ground it provides us with a new home, but if nothing ever happens it is money lost.
Insurance is akin to what a hedge fund was originally intended to provide: a means of reducing risk. Today, however, hedging is no more than a tool to maximize profits. None-the-less, most individuals see mitigating risk – or avoidance of potential loss of wealth – as a necessary and viable investment.
That brings us to another basic but very important question.
Understandably most of us relate wealth to net worth in terms of the dollar. However, in and of itself the dollar has no value. Real wealth is that which would remain should the dollar lose all worth.
That is not some abstract concept. Throughout history every fiat money has declined to worthlessness and the dollar is destined to do likewise. Today’s dollar would be worth but four cents in 1900.
Wealth can be created only through the production of tangible assets. Money accumulated through non-productive means has no enduring value. The only meaningful measure of wealth is not in dollars, it is in the purchasing power of the assets constituting that wealth.
That dollar-based wealth is at risk today is apparent. There is no better insurance against loss of that wealth than gold investment.
Gold investment is primarily about securing wealth for the future. Since the first days of commerce gold has been universally accepted as a medium of exchange because unlike anything else, the value of gold transcends every human era. The key to gold’s unique position is the consistency of its purchasing power.
Studies have proven what we intuitively know: the value of gold is independent of social and economic conditions. Over the long term one ounce of gold has purchased the same quantity of basic goods for hundreds, even thousands, of years.
The concept of purchasing power is the keystone of gold investment.
Returns on traditional investments may yield many more dollars, but if the accumulated dollars cannot purchase more than the same original investment in gold, there is a negative return on the investment. We are fortunate that the dollar’s value has been somewhat preserved by its role as the global reserve currency, but the curtain call is drawing near.
The state of global economics is in chaos and the dollar has fallen into disfavor.
The dollar has been purely fiat money for just 40 years. The final severance from gold came a quarter century after the dollar was made the global reserve at an international conference in Bretton Woods, NH.
It was a logical decision at the time. America had not suffered the loss of capital base that had devastated Europe, and foreign holders of dollars were promised that they could be redeemed in gold.
When President Nixon rescinded that promise in 1971 the dollar was so firmly entrenched in global trade that the world had little recourse. As the health of the dollar steadily declined, however, a search for a more stable base began.
The story is very old and has been replayed countless times. No fiat money has ever survived. Not surprisingly, gold has stepped in every time as a substitute for the failing currency.
Globalization is often made the scapegoat for our economic problems, casting blame on China’s trade tactics and Europe’s fiscal responsibility. While the situation is indeed complex, the fundamental weakness in our economy is not.
For decades we have spent far more purchasing tangible foreign goods than we have made selling our own. That has steadily eroded our capital base, shifting it from the hard assets of the manufacturing sector to the illusory assets of the financial sector.
Our staggering debt is but a symptom of the shift as we are drawn ever closer to the brink of an inescapable whirlpool. We can still save ourselves from that fate, but it will be a long and painful process.
In the meantime, individuals need not follow the ship of state on its perilous course. We can protect ourselves with investments in physical gold.
The distinction of physical gold is critical. Only possession of, or ready access to, real gold can offer protection of wealth in a crisis. Gold is real money, but we cannot spend what we don’t hold.
There are three basic options for investing in physical gold:
Gold bullion bars are the most basic form of pure gold and therefore they trade very close to the spot price. Bars produced by leading refiners such as Credit Suisse are guaranteed for weight and purity and are instantly liquid throughout the world.
Gold bars come in a variety of weights from as little as 1/20 ounce up to the 400-ounce London Good Delivery Bar. The most common one-ounce bar provides a convenient means to safely store substantial wealth, and the smaller sizes can readily be exchanged for essential goods in the event of economic collapse.
Modern gold bullion coins are produced by almost every nation today. They are almost always legal tender, but their denominations are only symbolic as their gold content far exceeds their value as currency. The quality and weight of the gold content of bullion coins is guaranteed by the minting government.
Like bars, gold bullion coins are available in a broad array of weights, with one ounce also being the most common. They are likewise exceptionally liquid and carry very low premiums.
Certified rare gold coins are those that once were circulating currency. The end of America’s gold coinage came in 1933 when the government confiscated all of the gold coins in circulation and melted them down into bullion.
Desperate governments will do desperate things to protect their economies, one of which could be confiscation of privately held gold. Many people believe the existence of such a threat sufficient to warrant serious concern. Fortunately numismatic coins have a well established precedent for being exempt.
There is more to rare gold coins than that, however. Their numismatic value provides potential growth in asset value that is separate and distinct from the value of the coins’ gold content.
In any form, control of an investment in physical gold is in the hands of the investor. No third party stands between you and your wealth and your investment is free from liability to anyone else.
There are, however other forms of gold investment, which are collectively known as ‘paper gold.’ None of them can be considered safe.
Paper gold is the Wall Street version of gold investment. Gold stocks and mining stocks are like any other equity – you own a piece of paper that can be traded on the exchange and nothing more. If the market crashes, so do your assets.
A third form of gold equities is more subtly misleading: Exchange Traded Funds, or ETFs.
ETFs appear to allow investment in physical gold in the more familiar equities market. A share in fact does entitle the investor to gold – a minute portion of some enormous privately held reserve. Taking possession of the gold, however, is not so easy.
Withdrawals are strictly limited to large quantities and are permitted only a few times each year. ETFs also impose considerable fees. Furthermore, the funds’ managers extract their fees from the gold reserves, reducing the amount to which investors can claim title.
Finally, and most important, gold in an ETF is subject to the fund’s liabilities. If the fund should fail, investors will be left to share only what is left after all other accounts are settled.
Physical gold is an economic investment, something purchased today to be used in the future to create wealth, but it is much, much more.
Physical gold is real, tangible wealth that has survived the most calamitous times man has brought about. From a brief downturn in the economy to total economic collapse, physical gold can provide for the wellbeing of your family.
No stack of stock certificates, regardless how high, and no quantity of fiat money, regardless how large, can promise the same.