Investing in Gold – What Form Is Best to Buy?

Are you thinking about investing in gold? The forms you buy should fit your motives for buying. Learn why other long-term investors are buying gold today.

There are many forms of gold available for investors, such as gold mining shares, mutual funds, gold bullion, bullion coins, rare coins, gold certificates, and exchange traded funds. To decide on the best form for your needs, you should be clear on why you want to buy. We have many more Precious Metals Investing Articles Now Available.

Here are the main reasons investors include gold in their investment portfolios:

1. Gold provides portfolio diversification

The low correlation of gold prices to prices of bonds and equities makes gold a worthwhile addition to a mixed investment portfolio in order to smooth returns and lower the portfolio’s long-term volatility.

2. Gold is an inflation hedge – a store of value – in normal times

Goods, land and equity prices tend to rise in price over time pressured by consumer demand as the government increases money in circulation. Increasing the money supply supports rising personal income, which encourages both savings and consumer spending, which stimulates the economy. But as prices rise, purchasing power measured in currency units (dollars) decreases. Because prices of gold, silver and other commodities will rise over the very long term, owning them preserves the value of your wealth (at least before taxes).

3. Gold is an effective hedge against dollar weakness

When fiat money (money with no intrinsic value and not convertible into something with intrinsic value) depreciates because investors are less inclined to hold it (for any reason), gold prices in that currency are likely to rise.

Historically, gold has exhibited an inverse relationship to the dollar, on the order of a correlation of -0.6, making it an effective hedge against dollar weakness.

4. Gold is an excellent investment during a period of hyperinflation

The disinclination of investors to hold their own currency in extreme cases leads to hyperinflation (and perhaps to economic system collapse). In this case dollar holders will buy commodities.

The flight to quality since the bursting of the real estate bubble and collapse of Lehman Brothers has led to high prices for Treasury debt, contraction of lending, and avoidance of risk-taking, in turn leading to high unemployment. Should the US lose its triple-A credit rating due to its recurring high budget deficits, it would not only affect the willingness of debt holders to roll over their Treasuries but might spark an exodus from the dollar and lead to hyperinflation. To beat the rapid dollar devaluation that accompanies hyperinflation, investors would pile into gold, silver and other commodities.

5. Gold is a safe haven holding in case of catastrophe

Because of its global acceptance and its store of value, gold is traditionally a safe haven investment. In case of economic system collapse, people want to have portable physical gold because a hard asset will be required to buy something of value, like food, and because durable assets (like automobiles and homes) may decline in price to such a great extent that an investor who has some physical gold will be able to buy them inexpensively.

Other factors affecting your investment decision

There are other considerations that will motivate an individual to buy gold or not buy gold at a particular time and which will influence the most appropriate form of gold investment. Among them: your time horizon, how much wealth you have to protect, your outlook on future inflation rates and future tax rates, what other assets you hold, and your views of the economy, government actions and public debt. We have many more Precious Metals Investing Articles Now Available.