“Everything looks pretty good in the world at the moment. Property and share prices have gone up a lot. Why buy gold now?”
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 risen a fair bit since the start of the millennium. But – they think that because everything seems fairly stable in the global economy right now that there’s no need to buy gold now.
Looking back at past articles, while we’ve mentioned many reasons as to why 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 everything seems fairly stable and gold hasn’t been rising in price so fast just lately, why bother to buy gold?
Off the cuff without too much thought we can come up with a multitude of reasons currently as to why to buy gold now including:
• Markets in General Are Still as Risky as Ever
Share markets globally have been rising steadily for many years. This is now the second longest bull market ever. So it seems likely we are much closer to the end rather than the start of the current cycle. Likewise with property prices. And we are now starting to see wobbles in the share market, with the US Dow Jones falling sharply over the past month or so.
• Geopolitical Risk is Still Very High
In recent years we have had warships amassing in the Strait of Hormuz over murmurings of Israel attacking Iran. There has been a lot of “sabre rattling” going on between China and Japan over the disputed Senkaku Islands. In 2017 we had the agitation between the USA and North Korea added to the mix. (See this article for more on that topic: How Might War With North Korea Affect the Gold and Silver Price?) Now we have the ongoing trade war between the USA and China added into the mix. Gold usually performs well in times of geopolitical tension and the stress levels are certainly rising at the moment.
• Global Central Bank Policy of Easy Money Remains
Central bank balance sheets have been ever expanding since the 2008 crisis. The European Central Bank, the US Federal Reserve and also the Bank of Japan have all engaged in massive money printing programs over the past decade. Now the US central bank is attempting “quantitative tightening”. But this looks likely to also have unintended consequences. (Read more on that here: Federal Reserve Balance Sheet Reduction: What Impact Will it Have?) But even with the USA attempting to raise interest rates, globally money remains very easy still.
• 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. Compare this to the increased purchasing power holding gold. Learn more about real interest rates and gold: Real interest rates in New Zealand | What can they tell us about when to buy gold.
• AAA Rated Bonds Are at Record Lows
Bond yields (interest rates) have been falling since the 80’s. US treasuries are still close to 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. And despite China being the largest miner of gold in the world, it is illegal to export gold from China. So what gold is mined in China, stays in China.
• Growing Net Central Bank Buying
Central banks turned from net sellers to net buyers of gold in 2011. In recent years 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. “Central banks currently hold 20% of all the gold ever mined—33,000 metric tons. And JPMorgan Chase says they’ll buy another 650 tons this year and next.” Source. Read more about central bank buying, particularly in the eastern hemisphere: Why Does Gold Demand Remain Strong in the East? and Why is Russia Selling US Treasuries and Buying Gold?
• Reasons to Buy Gold in New Zealand Now
Here’s 7 factors pointing to now being a good time to buy gold in New Zealand: Is Now a Good Time to Buy Gold in New Zealand? And why the New Zealand Dollar is The Number One Reason to Buy Gold in New Zealand Today.
Why Buy Gold? Here’s Some Timeless Reasons
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:
• Why Buy Gold Timeless Reason No 1: To remove some of your wealth from the banking system
Gold is the only financial asset that has no counter-party 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. Learn more: Why Gold Bullion is Your Financial Insurance
•Why Buy Gold Timeless Reason No 2: 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.
•Why Buy Gold Timeless Reason No 3: 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. For more on this see: Why You Should Become Your Own Central Bank – Even if Your Nation’s Central Bank Has Gold Reserves.
•Why Buy Gold Timeless Reason No 4: Protect your purchasing power with history’s best ever store of wealth
An often quoted point is that a fine toga and sandals in roman times cost an ounce of gold. Today an ounce of gold still buys a fine mens suit and pair of shoes. But, 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.
•Why Buy Gold Timeless Reason No 5: 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. Learn more: Why Buy Gold? No Fiat Currency Lasts Forever – What About the NZ Dollar?.
•Why Buy Gold Timeless Reason No 6: Used as money for millennia
Because gold is a store of value, unit of account and medium of exchange. Learn more about why gold is money: What Good is a Bar of Gold When the Shelves are Empty?
Why Buy Gold? Final Thoughts…
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, because 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.
What is the Inflation Adjusted Gold Price?
The current inflation adjusted price for gold to reach it’s 1980 high clearly shows how much upside gold likely still has left. Today gold would need to reach US$2,928 to match the 1980 high of US$850.
How about if we use the CPI figures from Shadow Government Statistics? – a more reliable measure than the current US government inflation numbers. The 1980 high now becomes $16,652. There is potentially a lot of upside to come in gold.
In fact by this measure gold is as cheap today as it was when the current bull market started in 2000. Even more significantly gold is the cheapest it has been for 300 years.
For more on what price gold could reach also see: How Do You Value Gold | What Price Could Gold Reach?
So you can see there are still plenty of valid reasons as to why to buy gold.
Or more information on the process of how to buy gold see: How to Buy and Invest in Gold >>
Can you think of any other reasons to buy gold? Share them with us and other readers – Leave a comment below!
Editors Note: Initially published on 26 September 2012. Updated 25 September 2018 to include new CPI adjusted gold price charts and updated reasons to buy gold now. Updated 11 December 2018 with how to value gold link added and central bank information updated.