Home > Gold and Precious Metals Investing > Why Invest in Gold?
Today’s price of Gold makes it cheap. Investing in the gold market is not just an option but a vital strategy for diversification, safety and profit. Is now is a good time to invest in gold mining stocks and gold sector funds?
Here are a few important reasons why you should seriously consider investing in gold market stocks right now:
Gold is a very effective diversifier
Diversification protects your portfolio against fluctuations in the value of any one asset class. Gold is an ideal diversifier, because the economic forces that determine the price of gold are different from, and in many instances opposed to, the forces that influence paper based financial assets such as stocks and bonds.
The Rising Price of Gold
Gold is a commodity whose price changes on the world markets. Since a low of $260/oz in April 2001, the Price of Gold has been steadily and quietly increasing. As the price of Gold increases, producing gold mining companies see an increase in profitability (by a % larger than the % change in gold prices). With a higher gold price, many proven gold properties that are not yet gold mines will become viable businesses. In many cases, these companies have been "sitting on the gold" just waiting for the market price of gold to go up. The value of these companies increases substantially when they become a producing gold mine.
Future Supply & Demand
Demand for gold is about 3800 metric tons per year. The supply of gold is declining and is currently about 2500 tons per year. As we all know declining supply and increasing demand leads to increased prices. When the price of gold goes up, the value of gold mining stocks and their underlying companies increases substantially.
Safe Haven Status of Gold
Historically, gold has acted as a safe haven in times of economic turmoil. It has been a monetary standard for thousands of years. Right now the US dollar is the monetary standard, but how long will investors remain confident in the value of the US dollar? Several key factors suggest that the US economy is in serious decline, despite what the government has been saying. As more and more people grow concerned about the world’s largest economy there is a big chance that people will return to the safety of gold as a store of monetary value. This demand will increase the price of gold and catapult many new gold mining companies into production.
Increasing US Debt
The total US debt is about $34 trillion compared to GNP of $10 trillion. Think about your own finances. How long could you survive with that debt/income ratio? The US has 5% of the world population and 60% of the world's debt. Sooner or later something has to give. This cannot be an indefinite trend. If the US economy begins to unravel under this incredible debt load, investors around the world will be searching for a safer place to store their money. History has shown that people always come back to gold. This demand will, of course, increase the price of gold and the value of gold market stocks.
Increase in the US Money Supply
The US has survived so far by printing more money (something individuals can't do). But when does supply and demand kick in? At some point the value of each dollar printed will fall. In fact, it has already fallen a great deal against other currencies. Printing more and more money raises the risk of hyper-inflation, drastically lowering the value of the dollar. Considering this risk, who would continue to want the US dollar as the monetary standard? If people grow shy of the US dollar then where will they turn? They might choose the Euro or the Yen, but history suggests they will return to gold. Gold mining companies and their stock prices will benefit dramatically from the uncertainty in the currency markets.
Pension Plan Deficits
US pension plan deficits sit at about $44 trillion. What happens when the baby boomers start retiring en masse? Where will the money come from? Many large corporations, which are anchors of world economy, are already swimming in very dangerous waters. This suggests a bleak future for many of the world's "blue-chip" stocks, the so-called "safe & stable investments". Many experts are now predicting that the markets will be rocked by the news when these pillar corporations can't meet their obligations. This will further reduce consumer confidence in the overall stock market and may well spark a move back to the historic safety of gold and gold mining companies.
For these reasons, gold at around $415 an ounce is quite cheap. As a comparison, gold today is less than half the price it was at its 1980 high. If the price of gold keeps rising, what does that mean for gold market stocks? Gold shares are hitting new six-year highs, and gold shares have outperformed gold bullion since March 2003.
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