Sunday, September 23, 2007

Why Are Smart Investors Buying Physical Gold?

Welcome to my blog. In this article, I will discuss something that I feel very strongly about, and something I have spent a great deal of time researching. What I believe is that we can benefit by holding physical gold or silver. Why do I believe this? One of the reasons is that gold is in a major bull market. But don't take my word for it, let's have the following chart do the talking, and you can decide for yourself.

This chart goes back to January 1st, 2001, and clearly shows that gold is the place to be invested. In a market such as this, it does not really matter when you invest. The best course of action is to buy and ride this bull market higher. This is a buy and hold market.

Gold has the potential to continue in this bull market for at least another 10 years. The reason I believe this is because gold has recently come out of one of the longest bear markets in history. This bear market lasted for about 20 years. Bull and bear markets tend to occur in cycles. Long bear markets have a tendency to produce long bull markets. The following chart shows gold's bear market between 1985 and 2001.

As you can see, gold did terribly from the 1980's to fairly recently, but those times are now over. So, reason number one for investing in gold is to make money. But there is much more to investing in gold than making money. Gold also offers protection. Protection against inflation. Did you know that the US Government increases the amount of money in circulation by 14% each year. This figure, known as M3, was getting so out of hand that the government stopped publishing it, but some analysts have been estimating it since its termination.

Excessive money printing translates to higher inflation, as there will be more pieces of paper chasing a limited amount of goods. But the government stats tell us that inflation is running at around 3%, so what's the problem? The problem is that figures are false, and basically are meant to mislead the public.

The easy way to spot this chicanery is when one looks at a chart showing the price of basic commodities that all of use in our everyday lives. The following chart shows an index that measures the average of such items. To be more specific, this index includes: gasoline, natural gas, corn, wheat, cotton, live cattle (beef), coffee, orange juice, and sugar. Essentially, items that the average person buys on a regular basis. Clearly, inflation is not running at 3%:

Also notice that gold and the index above tend to rise at the same rate, which means that reason number 2 for buying gold is protection against inflation.

The final point I'd like to make in support of owning gold bullion is that it is a defense against a depreciating US Dollar. Perhaps you think that money sitting in your bank is safe, but in fact it is slowly but steadily eroding away. The US Dollar has lost 98% of it purchasing power since 1913, and this process is only intensifying.

When measured against almost any currency, the US Dollar has lost a tremendous amount of value. We can look at an index that measures the Dollar against 6 other major world currencies, and when we do, you will see the dire situation the currency is in:

The US Dollar and Gold tend to move in the opposite directions. Thus, the final reason why holding gold will be to your advantage is that it's a shield against a falling US Dollar.

In this brief article, I have only scratched the surface of this important issue. There are many other resources that I would recommend you explore. You can do a Google search on such services as: Gold Seek Radio, Shadow Stats, and the International Forecaster; as well as individuals such as: Jim Sinclair, Robert Chapman, and Bill Murphy. This will help you gain many different perspectives on this issue.