Investing in gold or paper currency which is safer and why

Gold is one of the oldest currencies known to man and is highly valuable as an inflation hedge. Earlier the governments around the world used to settle their debts through delivery of certain amount of gold. Even the US dollar was backed entirely by gold till 1971. But once the backing of gold from the dollar was removed the dollar was not worth a lot. This was mainly due to the fact that it was easier to get something out of nothing when speaking of printing money.

When done for free without backing it up equal value of gold it was hard to resist printing it in excess. That is the reason why no paper currency has been able to hold its value for a very long period of time. Most are ruined in a few years time which some take a little longer than a few years. Even the strongest paper currencies of the world, the American dollar and the British pound have lost 95% of their value over the past century. On the other hand gold is still able to retain its original worth. Anytime is a good time for making investments in gold.

There are different forms that gold can take for the purpose of investment. The most common is gold bullion, which comes in the shape of bars in different weights and sizes. Unlike stocks the brokers charge minimal commission on gold bars and thus they are the most cost efficient investment that can be made. (Emanuel 2008) Why to Invest in Gold: The main reason why gold is so important to the economy is that it has been preserved successfully as wealth for thousands of generations. The same cannot be said about paper currency.

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This idea of gold preserving wealth is extremely important in our economic environment where the US dollar is declining and there is a rise in inflation due to high commodity prices. Gold has historically served as a circumvent against both the situations. When inflation rises gold appreciates. Also, the reason for gold benefiting out of the declining dollar rate is that gold is priced with the US dollar or with paper currency globally. The declining rate signifies that the buying power of the paper currency is declining. Drawbacks of Investing in Paper Currency:

Throughout history, while there has been a rise and decline in paper money, money like the Confederate money, gold has always remained stable. Gold is a solid investment which does not move up and down in its value; instead it’s the value of the paper currency which is relative to the amount of gold changes. Today, gold remains a solid investment, which never fluctuates; rather, the value of paper currency relative to the amount of gold changes. Gold is a perfect currency as well as investment as there are very few, almost no declines in its rate.

Also gold cannot be created just like any other paper currency can. Every paper currency through out history has fallen to its intrinsic value: zero but this is not the case with gold, currency may depreciate but the value of gold will appreciate. For a very long time dollar has been considered as the strongest currency in the world and that is the main reason why many foreign governments have bought the dollar hoping it would bring about long term economic stability to them, which in fact has not been the case as it has only lead to the runaway inflation we see around the world at the moment.

This is mainly due to the large demand for dollar which is lead to inflation; the high demand for one paper currency devalues another currency, that’s how the cycle goes. One currency appreciates at the expense of another that depreciates. Investing is paper currency is a risky option as the rates constantly fluctuate in comparison to gold which remains stable most of the time. (Amoss, 2008) Advantages of Investment in Gold: The biggest advantage of investment in gold is that it is not affected by the economic policies and where the bank accounts can be frozen, gold is freely available.

Also, gold is the most reliable of all long term investments, even after years of investment in gold there are only very few occasions when gold depreciates, so investment made in gold are safe investments. Gold is the only type of investment that can be cashed at any time anywhere in the world. Gold is the most liquid commodity in the market; it can be easily sold in different markets around the world. The price of gold is not affected by a company’s profit unlike stocks and bonds which when invested in give a return which is dependant on the company’s profit, this is not the case with gold, a return is promised every time.

That is why investment in gold to diversify can either be done conservatively or aggressively, in either case a definite value will still be added to the portfolio. The price of gold is dependant on supply and demand, US dollar rates, inflation and interest rates. But the biggest advantage of gold is that it generally increases in value and helps stabilize the investment portfolio. (Bill, 2006) Over the period of time it is not the price of gold that his risen but it is in actuality the value of the currencies that is going down.

The main reason for this being the fact that money can easily be printed. Over the years the Central Bank has increase the money supply which has lead to the decrease in its value. This is a process which needs to be implemented and it is something the Central Bank is committed to doing. Gold is an investment that cannot be destroyed on the other hand investing in paper money is not that good an alternative as with the increasing money supply the value of money will inevitably decline and thus the value of these currencies will decline over time.

Gold on the other hand has intrinsic value and when currencies like dollar or Pound Sterling depreciate in value over a period of time depending on the strength and stability of the economy. For example in times when there is hyperinflation and when the economy is not doing well, the value of your savings in paper money can be wiped away, in such type of crisis gold makes a good investment. (Douglas, 2008) In times of recession when the economy is close hitting rock bottom, investment in gold is a better alternative as compared to investing in stocks of most companies or in other words investing in the stock market.

Gold is an attractive investment even when a negative interest rate prevails in the economy (inflation is higher than the nominal interest rate). Because of the negative real interest rates the saving in banks become less attractive in other words investing in paper currency becomes less attractive. Investment made in paper currency only gives return in the face value of the currency i. e. if you have $ 100 in paper currency today in a few years time its buying power will decline a great deal.

You will not be able to get something worth $100 today in a year’s time. But instead if you invest that $100 in gold the investment will pay off a great deal as the value of gold will increase in a year’s time. Investment in gold always brings out positive returns, returns that more often than not increase. Even after centuries of the discovery of gold, it still is as valuable as it was back then in comparison the currencies for example the American dollar loses 2% to 5% of its buying power each year, the current worth of paper currency will go down each year.

In times like what we are suffering from today, there is a lot of uncertainty in our modern economic environment, for this reason gold is a safe haven for investment for no matter how much the paper currency appreciates or depreciates the rate of gold changes accordingly. History is full of examples of collapsing currencies. During such times investors who held onto gold were able to protect their wealth with success. Typically in today’s time when there are events that hint uncertainty investment in gold is a good option.

Conclusion

Investing in gold is the most sensible decision any investor can make in today’s world, specially looking at the declining currency rate and recession in the economy. With the current position of the economy the buying power of the paper currency will decline over time and thus investing in paper currency will be bad decision at the hands of the investors as the paper money will lose its value over a period of time as compared to the investments made in gold which will continue to vary according to the value of the paper currency.

Gold will be able to retain its real value even after a long period of time. The currencies will eventually die out and the buying power of any paper currency will be much lesser in times to come. This would mean that any investment made in paper currency today will decline in the future as the buying power of the paper currency will never be the same after a certain period of time, in fact more often than not it will be much lesser after a little period of time.

References

1. Balarie, Emanuel. (2008). Does It Still Pay to Invest in Gold? Retrieved on 18th November’2008 from http://www. investopedia. com/articles/basics/08/invest-in-gold. asp
2. Bonner Bill. (2006). Gold versus paper money. Retrieved on 18th November’2008 from http://www. dailyreckoning. co. uk/gold-investment/gold-versus-paper-money. html
3. Gnazzo, Douglas. (2008). Gold vs. Debt: The Death of Paper Money. Retrieved on 18th November’2008 from http://www. safehaven. com/article-11265. htm
4. Dan Amoss (2008) Every Paper Currency Falls to Its Intrinsic Value: Zero. Retrieved on 18th November’2008 from http://www. contrarianprofits. com/articles/every-paper-currency-falls-to-its-intrinsic-value-zero-2/4373

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