Gold is the categorical dollar hedge investment. To counter the falling dollar, the best course of action is to invest in gold, whether you invest directly in the metal itself, purchase gold mining stock, or choose mutual funds. As the dollar falls, gold rises. The American blue chip industry cannot compete in the global economy anymore. Gold will be the key to growth. Even if we do not return to the gold standard, the value of gold has always been high (as you can see by reading our History of Gold post), and this will not change. Therefore, it is in your best interest to invest in gold now. Fortunately, there are several different ways you can invest in gold, which we will outline below.1
Direct Ownership
The gold bullion is pure value. This can be seen by man’s relationship with gold throughout the centuries. This can be demonstrated by ancient Egyptian civilizations that buried mountains of gold with their pharaohs as they believe it would be necessary to use in the afterlife. Gold has started many wars, and we can see people’s desperation for this precious resource by the conditions endured during the Gold Rushes. This stands to reason, as gold is far more valuable than paper money could ever be. Gold cannot be controlled by governments the way paper money can; hence why governments go off the gold standard.
The value of gold rises based on the simple economic principle of supply and demand, regardless of policy around interest rates or the manipulation of paper money. The one significant disadvantage of gold is that there is wide spread between bid and ask prices, so you cannot expect a quick profit. You will buy it at retail price and sell it at a wholesale price, so the jump between these needs to be significantly even just to break even. That is why gold should not be seen as speculative asset; instead, consider it a defense asset to hold value. As your dollars will fall in value, gold allows you to preserve value. To own gold directly, it best to invest in minted coins, such as Canadian Maple Leafs, American Eagles, or South African Krugerrands.
Gold Exchange Funds
Another way to invest in gold is a gold exchange traded fund (ETF). ETFs are kind of mutual fund that trade on the stock exchange; the portfolio is fixed and won’t change. So gold ETFs are composed solely of gold bullions as the asset. There are two ETFs in the U.S.; “GLD” (SPDR Gold Trust) and “IAU” (the iShares COMEX Gold Trust). Either is a sensible option for holding gold.
Gold Mutual Funds
Gold mutual funds are a sensible alternative for holding gold bullions for those who hesitate to invest in physical gold. Gold mutual funds hold stocks in companies that mine for gold. An example of this is Newmont Mining (NEM), a well-capitalized company with a good track record for making a profit. This is an example of a senior gold stock, which is invested in a company that owns well-established mines that produce a fair amount of gold every year. This is a more conservative play than investing in newer gold companies.
Junior Gold Stocks
Junior gold stocks are more uncertain than senior gold stocks. They are in companies that have less productive mines or may be exploring, which can lead toa large profit, but presents a greater risk. These stocks are best for investors with a wider risk tolerance, and who can accept potential losses for possible major gains.
Gold Options and Futures
Options may be the right move for seasoned investors. They allow you to speculate gold prices. In the options market, you can make guesses for movements in either direction. Buying a call means you will hope prices rise. A call fixes the purchase price; the higher that price goes, the larger the margin between your option price and the current market price. On the other hand, when you purchase a put, you anticipate the price falling.
Buying options is a risky way to invest; most people fail. About 75 percent of all options bought are worthless. This is a complex market that requires vast knowledge. There are two primary traits of an option, one that is positive and one that is negative. The positive trait is that investors are able to control their large investment using a small amount of money. The negative trait is that options expire after a certain amount of time. As the expiration date comes closer, the time value of the option vanishes. For the majority of investors, the futures market is out of their league. Even experienced investors see how high risk the futures market is. Large profits can be made, but can be lost almost instantly.
We don’t know when the dollar will collapse, or how long it will take. We just know that it will happen. After years of mismanaged monetary policy by the Federal Reserve, there is no question of its inevitability. The removal of the U.S. dollar from the gold standard has had a long-term impact. Nixon saw this as a way to solve the economic issues of the time, but as a result, we see ever-growing debt, trade deficits, and endless money-printing creating a credit-centered economy. Taking a broad view of the global economic market, an investor can see that problems are inevitable. We have delayed this trouble slightly due to China’s parallel economic troubles.
China has built debt upon the troubled U.S. dollar, bringing with it other Asian economies. The fall of the dollar will be a major issue for not just the U.S., but many other countries with it. To offset this, commodities are a logical choice, such as oil, and yes, of course, gold.
This exemplifies the ironically predictable pattern of monetary policy. Governments will overprint money, destroying their currency. Then, they will go back to gold, going through much expense and suffering. At this moment, we are at the precipice of another collapse, as poorly planned monetary policy fails us. However, we do not have to wait for the dollar to collapse. Respond today. By being proactive now, investors can anticipate this collapse by investing in tangible assets that will hold value regardless of what happens to the U.S. monetary system.
Currency is not valuable in itself. It is essentially an IOU that today holds no real value. Once the national credit limit is reached, monetary policy will have to be changed, and investors will lose. Investors who hold stock in goods with a tangible value will be the ones who benefit. The key is starting from a good position before this collapse.
