The many reasons to invest in gold | Investments

The many reasons to invest in gold

Written by Eddie Thompson

Monday, 18 April 2011 10:34

by EddieThompson

If you haven't thought about adding gold to your investment portfolio before, you may be missing out on one of the best hedging investments possible. What that means is that gold can protect your portfolio when things go bad. If the value of the dollar plummets or if inflation rears its ugly head, gold will most likely increase in value significantly. In fact, if a serious monetary or inflationary crisis were to occur, gold could truly explode in value. This is some serious protection for your portfolio, the kind of protection that allows you to sleep safely at night.

So how does hedging work exactly? Before we get to that, I first want to cover some basics. Gold has been used as a store of value and wealth for hundreds, even thousands, of years. Societies of all kinds have used currencies linked to gold in order to maintain and protect their wealth. But these days, we have pretty much abandoned this "hard" money system. The primary currencies today, such as the pound, euro, yen, and dollar, are all what are often referred to as fiat currencies. Basically, this means that the currencies themselves are simply paper and that they have no inherent worth. Instead, a fiat currency only has value because a government says it has value. This is what we mean when we say "fiat." Modern fiat currencies are no longer backed by gold. In reality, they're just paper.

Why should you care about this? It's important because, since the currencies of the modern world are no longer linked to gold, their values can be manipulated by governments and central banks. Specifically, the central banks of the world can inflate their money supplies, which basically means that they are simply creating more money out of thin air. Inflation simply means that the currency loses its value over time. This is why prices on most things, including food and housing, continue to go up virtually every year. In fact, since the US dollar was taken off the gold standard, the Federal Reserve has inflated the money supply to the point where a dollar today is worth 96% less than it was when the dollar was linked to gold. Obviously, this is a real loss in value, and this trend will only continue as inflation again increases.

Now, here's the important part: the Federal Reserve has implemented some unprecedented actions after the financial crisis of 2007 and 2008. These actions include a sharp increase in the money supply. What this means is that if inflation increases again, the value of your hard-earned dollars is going to drop even more. In fact, a number of experts believe that these dangerous moves by the Fed could potentially lead to the collapse of the dollar. This would have truly devastating effects on the economy, let alone your investment portfolio, which is denominated in these potentially worthless dollars.

After considering this worst-case scenario, let's turn our attention back to gold and its benefits. You can protect your portfolio from a serious monetary crisis by adding gold to it. That is what the term hedging refers to. Even if a crisis happens and part of your portfolio drops significantly in value, the hedged part of the portfolio can make up for it by increasing in value. In the case of a dollar collapse or significant inflation in the US, gold is poised to shoot higher and retain its value. When it comes down to it, gold can offer you protection that no other asset class can.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

As uncertainty in the global economy increases, the time has come to consider all of the reasons to put your money in gold. Gold has the ability to protect you from serious inflation and an economic crisis. You really should consider an investment in gold.. This article, The many reasons to invest in gold has free reprint rights.