The Financial Beacon, Doug Carey
In the last year gold prices have increased by nearly 100%. Since mid-2003 gold prices are up an astonishing 300%. Just as the price of gold was beginning to stagnate somewhat, the turmoil in the Middle East erupted and gold is on its way up again. Many are wondering, why has this yellow metal gone up so muchover the past few years? The simple answer is that people are losing faith in currencies around the world and gold has been a safe haven for wealth for thousands of years.
Before the era of paper money, civilizations used various items as currencies. They used gold, silver, copper, and even spices. Most people are aware that in prison and prisoner of war camps, cigarettes are often used as currency. All of these things have something in common: They have real value to people. As time marched on, gold became the most widely used form of currency because it is rare, difficult to find, and is malleable, which means it can be easily turned into coins and bars. As societies grew more organized and banks sprang up, banks would hold onto people’s gold and issue paper receipts for it. This was how the first paper money came about. But unlike today, this money was backed by something; it was backed by gold.
Today our currency and virtually every single currency in the world are backed by nothing. We are subject to what is called a fiat currency system, which means our dollars are money only because the government says it is. The American dollar was backed by gold until 1971 when President Nixon declared that the United States would no longer exchange gold for dollars. Not surprisingly, prices have risen over 450% since that time because, without a gold backing, paper currency can be printed at the whim of the Federal Reserve and the Treasury.
So why are so many people just now starting to lose faith in paper currencies? For one, during the financial meltdown in 2008 and 2009 central banks around the world flooded their banking systems with new money in order to save them from outright collapse. The Federal Reserve alone created over $2 trillion out of thin air and injected it into the U.S. banking system. They are currently printing money and buying U.S. Treasury debt and plan to continue this for at least another year.
Not surprisingly, with all of this money being created around the world, inflation rates are starting to skyrocket. Even before the turmoil in the Middle East, food and energy prices were rising across the world at rates not seen in decades. The world food price index is up 78% in the last year alone, which some point to as the leading cause of many of the revolts taking place in the Middle East. Prices here in the U.S. are just now starting to catch up with the rest of the world, with the Producer Price Index up nearly 4% over the past year and the Consumer Price Index up 1.6%.
With central banks printing money, oil prices close to $100 a barrel, and increasing volatility in the world, it’s difficult to figure out how to find a safe investment. It’s even more difficult when savings accounts and money market accounts are paying basically 0%. But gold does very well in times such as these. Gold cannot be printed or counterfeited. It maintains its value even in the worst of times and has thousands of years of history to back it up.
In terms of how to invest in gold, today it is easier than ever. There are multiple Exchange Traded Funds (ETF) that provide access to gold. The most popular is an ETF named GLD. Another favorite is an ETF whose holdings are in Switzerland called SGOL. For those who do not trust these funds and are afraid the issuers don’t have enough gold to back the shares they are selling, there are also many ways to buy physical gold online, with sites such as Goldline.com leading the way. Lastly, there are now easy ways to invest in gold mining stocks using ETFs. The most popular one is GDX, which invests in multiple gold miners who have substantial assets. The riskiest, yet potentially most rewarding, play is GDXJ. This ETF invests in junior mining companies who are not yet proven, but could reap substantial profits if gold prices continue to climb.
For those looking for an investment vehicle that provides a great hedge against currency debasement and general strife in the world, gold is one of the best hedges there is.