“Gold’s been going up a fair bit but surely it can’t go any higher?”
That’s one of the common responses we get when we mention we are involved in selling gold and silver bullion. Unlike a number of years ago the average guy or girl in the street now knows that gold has been rising for a number of years. But – they think because it has been rising for a lengthy period of time that it can’t possibly go any higher and it’s far too late to buy now.
Actually looking back at past articles, while we’ve mentioned many reasons as to why to buy gold in the past, we’ve never actually written them all down in one place.
So today we turn our thoughts to the question “Why buy gold now?” if it’s been rising for many years already.
• Markets in general are still as risky as ever. Share markets globally while going up recently have over the longer term of the past 10 years really just been moving in a sideways range. So your purchasing power has been reduced.
• Geopolitical risk is still very high, in fact at the moment higher than for some time. There are warships amassing in the Strait of Hormuz over murmurings of Israel attacking Iran. Also there is a lot of “sabre rattling” going on between China and Japan over the disputed Senkaku Islands. Gold usually performs well in times of geopolitical tension and the stress levels are certainly higher at the moment.
• Global (co-ordinated?) Central Bank policy of easy money. Central bank balance sheets are ever expanding these days and with the European Central Bank, the US Federal Reserve and also the Bank of Japan all announcing further money printing programs in recent weeks this doesn’t appear to be changing in a hurry. In fact the US federal reserve confirmed it will keep interest rates near zero for even longer, through until 2015. Plus in what has been dubbed QEternity, they have announced they will continue to print money amounting to $40 Billion every month with no end date.
• Real interest rates are negative. A common misconception is that gold performs poorly when interest rates rise as gold pays no dividend or interest. However the key is what real interest rates are doing. The real interest rate is the nominal interest rate less the rate of inflation. Currently there is very little reward in the form of interest for keeping your money in the bank, so you get nothing in return for money in the bank. Compare this to the increased purchasing power holding gold.
• AAA rated bonds are at record lows. Bond yields (interest rates) have been falling since the 80’s. US treasuries are at the lowest ever rates in history. So as above no return here.
• Mine supply is flat (as is scrap gold supply). If supply holds steady and demand continues to rise, prices will likely continue to rise too.
• Soaring Chinese buying. Chinese continue to import vast amounts of gold every month.
• Growing net central bank buying. Central banks turned from net sellers to net buyers of gold only last year in 2011. In recent months these have included Russia, South Korea, Mexico, Kazakhstan, Ukraine, Sri Lanka, Philippines, Turkey and most likely China who don’t report their holdings very often at all.
On top of the current reasons above, there are also a number of what you could call “timeless” reasons as to why to buy gold:
• To remove some of your wealth from the banking system. Gold is the only financial asset that has no counterparty risk. Physical gold in your possession has no debt obligation, so there is not someone else on the other side of the trade whom you rely upon to remain solvent.
• Protection from devaluation – paper currencies have steadily been losing value over the past century. Precious metals “store of wealth” characteristics offer protection against government devaluation of currencies. Be they of the slow and steady kind by inflation of the money supply or overnight devaluations by government decree.
• To become your own central bank – in case you didn’t know the Reserve Bank of New Zealand has no gold reserves, so don’t expect any help from them in terms of maintaining the purchasing power of the NZ dollar. Buy gold and become your own central bank instead.
• Protect your purchasing power with histories best ever store of wealth – An often quoted point is that a fine toga and sandals in roman times cost an ounce of gold. While today an ounce of gold still buys a fine mens suit and pair of shoes, the same can not be said with any fiat or paper currency of only 100 years ago. $20 may have bought a suit in the early 20th century. It doesn’t buy much more than a couple pairs of socks a century later.
• Every fiat (government decreed) currency has eventually gone to zero throughout history. Today we are in the unique situation where every currency on the planet is a totally unbacked fiat currency. And history has shown that no fiat currency lasts forever. So buy gold as it can’t go to zero and will always be worth something, if a few thousand years of history is any indication.
• Used as money for millennia – as gold is a store of value, unit of account and medium of exchange.
It’s interesting that people have no trouble believing property prices can go up year after year, but struggle to comprehend why it is that gold is rising in price. Even though both are often driven by the same factors such as easy money, low interest rates and expanding debt.
We believe it is paper currency that is in a bubble not gold. That is, that as gold reflects the amount of paper currency in existence we can therefore state that there is no limit to how high gold can go. With Central Banks the world over continuing to create more currency out of thin air, the paper bubble can be inflated much higher yet.
If you agree and would like to buy some gold bullion then head on over to our order page to check todays indicative prices to buy gold now.
Can you think of any other reasons to buy gold? Share them with us and other readers – Leave a comment below!