Gold as an Investment

Gold has been on the scene for at least 5,000 years – a much longer period of time than stocks or bonds, and, for that matter fiat currency (paper currency issued by governments). In difficult times like our own, investors turn to gold as an alternative investment to stocks and bonds, or occasionally as a hedge against these paper investments. In exceptionally difficult times, ordinary citizens, as well as investors, have been known to flock to gold for economic survival.

While gold frequently does perform well against stocks and bonds, the single best inverse measure of the value of gold for over forty years has been the value of the US Dollar. In other words, with occasional exception in the short term, as the dollar has decreased in value, gold has steadily increased in value. And vice versa.

Until 1971, every US Dollar was backed by gold. President Nixon changed that when he repealed the gold standard. No longer would every US dollar be backed by gold. The United States was now free to print dollars at its pleasure. Now the value of the dollar would decrease, and the value of gold – always in limited supply even after new mining – would continue to increase.

The bull market for gold continues at a daunting pace. Given America’s fiscal problems and Europe’s current financial difficulties, there’s a strong chance that gold will continue its climb. The yellow metal has steadily increased in price from $70.00 per oz, the highest closing spot price in 1972 to $1,421 per oz, the highest closing spot price in 2010. The closing spot price of gold on August 18, 2011 was $1,824 per oz. All told, gold has enjoyed a compound annual appreciation of over 20% for the last twelve years. So learning how to invest in gold in today’s market is imperative if you want to solidify or diversify your portfolio.