Buying Gold to Meet your Investment Goals

by Jerry White

Americans are buying precious metals, many for the first time. Often they fail to match the form of gold they buy to the reason they are buying, either failing to meet their investment goals or overpaying for what they need.

Some buyers are concerned about the erosion of their purchasing power as the government runs the dollar-printing presses and the Fed buys Treasury bonds. Some are concerned about a possible collapse of the US financial system in the face of sharply rising government debt. Some want to diversify a stock and bond portfolio.

Here are five main reasons investors are buying gold:

Diversification of your portfolio

Gold’s low price correlation to bonds and equities make it worthwhile to add to a mixed portfolio. Adding a small amount of gold — as little as 5-10% — to your stocks and bonds portfolio can smooth your returns.

A store of value preserves purchasing power

Prices of goods and services tend to rise over time as the government increases money in circulation, pressured by consumer demand. But price inflation has an adverse effect on purchasing power. Because prices of commodities will rise, owning them preserves the value of your assets (before taxes).

Take advantage of higher prices from dollar weakness

Low or falling interest rates, deflation, risk of systemic problems affecting the banking system, and increasing bond default risk will lead dollar holders to sell dollars for other currencies or gold. Gold is an effective hedge against dollar weakness.

Protect against hyperinflation

The adversion to holding your own currency in extreme cases leads to hyperinflation. Dollar holders will dump dollars and other fiat currencies for commodities. Investors would pile into gold, silver and other commodities to beat rapid dollar devaluation.

Safe haven hedge against catastrophe

If you are concerned about impending catastrophe, like the collapse of the US banking system, then you might want to hold some portable physical gold. In an end-of-the-world scenario, you will have something of value to barter for food and safe passage.

Buying gold and silver

Which form of gold or silver is most appropriate for you to buy will depend on your motivations for buying. Your time horizon, assets, outlook on future inflation rates and tax rates, and your views of the economy, government actions and public debt will also determin the best form of gold investment.

Some forms require storing the metal yourself, though that might suit your needs. Some forms could be more easily spent if you needed to, such as small fractional denominations of bullion coins, but they are more expensive than other forms.

When it comes to buying the appropriate forms of gold to meet your investment goals, it helps to have a reference such as our precious metals investor’s guide, How to Buy Gold and Silver Today.