Three Big Reasons to Buy Gold
In an earlier post on debunking gold myths, I mentioned how 4 common reasons often used to explain why you should buy gold now were not as relevant as you might have been led to believe. However I also mentioned that there were positives going for gold, which I’ll cover in this article.
First, supply and demand.
http://www.research.gold.org/supply_demand/ The chart shows that industrial and jewelery demand is down (as expected due to the recession ) but due to strong investment demand, overall demand for gold in 2008 is actually higher than 2007.
Secondly, the so-called financial crisis appears it will worsen for a while.
The Federal Reserve has increased its balance sheet by enormous proportions. In short, this will cause a huge increase in the base monetary supply.(http://www.bloomberg.com/apps/news?pid=20601087&sid=aGq2B3XeGKok&refer=home “Federal Reserve lending to banks peaked at a record $2.3 trillion in December, dropping to $1.83 trillion by last week. The Fed balance sheet is still more than double the $880 billion it was in the week before Sept. 17″) However, most of it will not flow into the real economy anytime soon. Banks are still risk averse and unwilling to lend. Mopping up this excess amount of money when the economy recovers may be quite difficult and this is a precondition for gold to boom.
Thirdly, hedge funds and momentum funds mostly invest in the “hot thing”.
Remember how they took oil up to $147 per barrel even though the world economy was obviously headed for an iceberg? That’s because stocks were crashing then, commodities were up and the dollar was falling. So they jumped on the bandwagon and it became a self-reinforcing trend. Commodities were thought of to be safe havens despite obvious demand destruction. So if we look around for investment vehicles that haven’t lost a lot of ground in 2008, only two things really pop out—T bonds and gold. Gold crashed below $700 a while ago due to deleveraging and the deflationary environment, but has shown resiliency since then. I believe this relative outperformance will attract more interest and money to gold.
There you have it, four reasons not to buy gold and three reasons to buy gold. No investor can be totally sure where the direction an asset will head, it’s usually a decision made taking the positives and negatives into consideration. Perhaps more important would be considering how much of your portfolio you plan to allocate to gold and how much maximum loss you are willing to take.
This was a guest post by StockTradingToGo Community member Allen. View more posts from this author.
