You want to diversify your investments, you say? To some that means buying stock in something besides the usual blue chip, or whatever “bullet proof” sector is at the moment. Ever think about buying some gold, or maybe an ETF that is funded by gold? Here are some pro’s and con’s you may want to consider.
Of course you want to invest in something that has as little risk as possible, right? But what about inflation – you must also have something to hedge against inflation or your money will erode year after year. One of the better hedges against inflation is gold, which tends to go up in value whenever the dollar and other currencies are heading down. Right now in this country we seem to be enjoying a low level of inflation, but for how much longer? The way Uncle Sam is printing money, there is no way to stop inflation from coming back to bite us at some point. It’s just economics 101!
As a pure hedge against inflation, gold is right up there with the best of them. While the “official” inflation rate runs only about 2-3% per year, the unofficial rate as we all know is much higher, probably closer to 8-10%. Which means you must earn 8-10% on your investments each year just to break even! However, gold has been steadily rising in price for the past several years, going from about $320 per ounce in 2000 to over $1100 in late 2009 – not bad, eh? And when have you ever seen gold drop down to nothing? Stocks may, but gold will never do that. Unless they find a machine that can make it…just kidding.
Ok, so that covers a few of the pros of investing in gold – what about the cons? That really depends on how you are investing, the vehicle. If you are buying strictly gold bars, the downside may be that you have to store it for a long period of time, in a safe place of course. Storing it in a bank safe deposit box will cost money, adding to your expenses. If you are purchasing stocks in a mining company uoking, your returns (if any) are at the mercy not just of future gold prices but how well the company is managed. Futures and options hold risk as well, depending on what exchange you happen to be purchasing them from. If an exchange decides to raise the minimum amount you need to put down to purchase a futures contract, you may not have the cash to go through with it. This could also dissuade others from purchasing contracts, and if you are trying to sell yours, the cost could rise and take away from your profits.
Another risk, although you may think it is small, is the political risk. In some cases, such as when the U.S. decided to make gold ownership illegal in the 1930’s with the Gold Reserve Act, the price of gold could be made a fixed price. A more likely scenario would be a foreign government suddenly nationalizing an industry to take it over, such as happened in Venezuela when they took ownership of a Canadian gold mining company called Crystallex International, whose shares promptly fell. This isn’t a regular occurrence, however it pays to do your homework and be cautious.
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