Worth its Weight: Six Reasons to Buy Gold Today
October 22, 2012 by Gold Editor
SOURCE: [Axel Merk - Merk Fund] - “He who has the gold makes the rules.”
Imagine the surprise of the world’s first circumnavigator, Ferdinand Magellan, when upon arriving on the sandy shores of the present-day Philippines in March 1521 after the first- ever Pacific crossing, he was offered a gold bar and some spices by the native king. Gold – it was a store and show of wealth, even there, even then – in uncharted, uncivilized territory, halfway around the world, half a millennium ago.
Perhaps Magellan shouldn’t have been so surprised. Gold had been “money” for more than 2000 years prior to his time. The first gold coins were struck in about 700 B.C. in modern day Greece. Throughout recorded history, other assets like weapons, spices, art, metals and even food have had their day as leading stores of wealth, but gold has endured as the supreme evidence of wealth across all cultures and time.
Little has changed today. Gold competes with other assets stocks, bonds, real estate, and paper currency among others as stores of wealth. But in to- day’s changing and ever more volatile world, the value of these other assets may fluctuate more than ever. What’s more – paradoxically – in response to volatility, the policies of governments and central banks, in an effort to dampen economic downturns and prop up asset prices, may in fact make gold more valuable relative to these other assets. In our opinion, the real purchasing power of gold, over the long term, may rise.
Like most assets, price is deter- mined by demand and supply. Going forward demand for gold may continue to rise, while supply will remain con- strained as it has since the beginning of time. With this backdrop, let’s explore some specific reasons investors may consider buying gold at today’s prices.
Reason 1: Hedge Against Inflation
There was a time, until World War I, when gold was money and money was gold, or at least backed by real, physical gold. Then the need to repay war debts induced the involved countries to “print” money. Countries became partially disengaged from the gold standard then, and more disengaged with the onset of the Great Depression and World War II. But printing money on a massive scale happened only during these crises.
Today, it seems that the “crisis” is nearly perpetual, and the virtual printing presses run all the time. Virtual? Yes, you don’t even have to print the money any more; it can simply be created with the stroke of a key- board. And it’s become so easy that trillions in new paper “fiat” currency will be created – all to chase the same amount of goods and services. It may be worth keeping in mind that there is no upper limit to the amount of dollars that can be created, and to the extent that gold (or anything else for that matter) is priced in dollars, there is no upper limit to what the price of gold can be. One estimate calls for $15 trillion to be printed in the next three years worldwide. We are getting ever further away from the gold standard.
Of course, that brings the potential for uncontrollable inflation. That is, unless these central banks can “mop up” the liquidity, withdrawing the cash from the economy. But in doing so, central banks will slow their economies – a politically unpalatable scenario. Add to that the crushing public debt loads, which induce countries to inflate their way out of debt, that is, to allow their currencies to depreciate and pay with cheaper money later, and we have a powerful mixture for future inflation. And what happens when there is inflation – or when people anticipate inflation? The price of gold may go up.
Comparatively, the next five reasons are relatively simple: