Tuesday, January 12, 2010

Shielding Your Portfolio From Inflation With Gold

For thousands of years gold has been regarded as a reliable currency that is resistant to inflation. Especially in times of crisis and fear, the demand for gold tends to rise as currencies are debased. See the following article from Commodity Online for more on this.

Too much is written about gold these days simply because the yellow metal price has been on a steady rise for the last one year. When gold touched $800 per ounce in January 2009, investors and gold bugs applauded, hailing the precious metal as the best investment asset that people should hold and continue to own.

From $800, gold has been rising to the cheers of investors, central banks, bullion traders and gold enthusiasts. So when the yellow metal reached a peak of $1,227 per ounce in November 2009, there was delirious clapping from gold bugs and bullion analysts who said the next stop in the golden journey of the yellow metal was $1,500 and then it would head toward $2,000 per ounce. Since then gold price has stabilized around $1,100 range, and everyone is waiting for the next big move.

What is that is luring all and sundry to the glittering metal? Is it more precious and valuable than the real estate you buy in upcoming developing nations like China and India? Is it bigger asset than the money you safely put in the bank with nominal interest? Is it more secure that the variety of life and other insurance policies that are available in the market? Or is gold more precious than other metals like silver, copper, diamond, platinum, palladium etc?

Why are central banks building up gold reserves? Is it because gold offers a better foreign exchange asset than US dollar or other currencies?

The answer to all these questions can be summarized in two words—currency and inflation. Gold is currency in the modern world. Gold is the best hedge against rising inflation for many countries.

I came across an interesting article on gold as currency and inflation hedge in inflationdata.com. Here are some extracts from this site on how the prominence of gold is rising along with the price rise in the yellow metal:

Historically, gold and money have been pretty much synonymous so pure Gold was immune from inflation. But that didn't stop currency inflation. In the early days kings discovered that they could "extend" their money supply by adding just a bit of lead to the melting pot.

Unfortunately, as the percentage of lead increased the value of the coins decreased causing the first cases of inflation. (And also creating the habit of biting coins to see how soft they were and thus how much lead they contained).
Egyptian Pharaohs issued the earliest gold coins, around 2700 B.C. But they were primarily as gifts for friends and not for commerce. It wasn't until (560-546 B.C.), that King Croesus of ancient Lydia began issuing Gold coins for general circulation. (Incidentally after 2500 years, the saying "rich as King Croesus" is still floating around).

Incidentally, every country that has employed fair Gold coinage has prospered while those that inflated their coinage with "base" metals failed.
One example is Spain.

During the time that Spain was issuing their famous "pieces of eight" it was a world "superpower" but lost that status as it debased its currency.


See the rest of this article at
Inflationdata.com
This article has been republished from Commodity Online. You can also view this article at Commodity Online, a commodity news and analysis site.
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