Why Buy Gold

So why buy gold today you may ask?

With the recent price drop in gold – the biggest two-day drop in 30 years – it’s easy to get carried away and forget why you should buy gold in the first place. Remembering the rationale for buying and holding gold will make you more resilient and comfortable when the markets get crazy.

Buying gold stocks, such as the junior miners, ETF’s, derivatives and leveraged investments is pure speculation. You are basically hoping to get the timing right by buying low and selling high – receiving a nominal gain in fiat currency.

Speculating involves taking on much higher risk, often for shorter periods of time with a smaller part of your portfolio, with the aim of making large gains. You are essentially hoping to buy at $1000 and to sell at $5000. As we all know it’s usually not that easy.

One thing to take into consideration is that many of the “paper” metals are extremely volatile and thus make for bad “investments”. The junior miners are probably one of the most volatile areas there is. Buying leveraged products on these and the pure metals therefore come with significant risks.

If you find yourself constantly checking gold and silver prices then you’re probably speculating in these products. If you only own physical gold and silver and still think this way, then you need to re-evaluate how you view your holdings.

Gold actually makes for a really bad speculation. It can’t, like most physical assets, go to zero. Gold will always have some value, as it is physical and real. And for physical gold, there’s very little leverage available.

Gold isn’t ideally suited as an investment either. The price of gold tends to rise and fall over the long-term with inflation and inflation expectations, thus offering a better inflation hedge than stocks and bonds typically do. But, if gold is connected to inflation, then you can’t expect much of an inflation-adjusted return.

Gold should be viewed as insurance, as a crisis hedge and a way of storing wealth for the long-term.

One lesser discussed benefit is that for many people, having access to easily available cash in a savings or current accounts often leads to consumption, or the feeling of having to “do something” in relation to investments and speculation.

As most successful investors know, patience is key and often it’s as much about not choosing to invest in something as choosing to invest. Private investors often get this wrong as they are searching for action. With gold it’ll be easier for you to control these emotions, as you typically don’t “trade” physical metals the same way you would with paper instruments.

Gold shouldn’t really be viewed as rising and falling in value at all – it’s the dollar that is getting increasingly volatile – and this is reflected in the price of gold. What you should be concerned about is how many ounces of gold that fiat currency will buy you.

If the price of gold falls you will be able to buy more ounces, and as gold rises you will get fewer ounces. With this in mind you should see the current price drop in gold as a great buying opportunity. The lower the gold price, the better for you. Once you’ve reached this state of mind you won’t feel the urge to constantly check the prices. Instead, the current price drop will offer you some opportunities.

Gold is a proxy against the financial system. By buying gold you are able to withdraw savings from a fiat currency and hold something that isn’t someone else’s liability and which can’t be created out of thin air. It’s like the saying, if printing money was a way of generating wealth, then Zimbabwe would be the richest country on earth. Wealth is created by spending less than you earn and saving the difference.

So should you go all in now that gold is “over-sold”?

As with any investment, speculation or purchase it makes sense to average in. This basically means that you shouldn’t buy everything at once. By spreading your purchases over a longer period of time your average will typically be lower than if you would get into the market all at once.

If you today are sitting on a large pool of cash then buy some gold every month or quarter. You can even allocate a portion of whatever you’ve saved during the year into gold in December. If you’ve already bought gold during a number of years I wouldn’t be so concerned about the timing. You are taking part of one of the strongest secular bull markets in recent time. There is no need to be stressed about getting into the market at an optimal price level. If you’re just starting out now on the other hand, the current price drop will give you an excellent buying opportunity.

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