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Why Invest in Gold?

Why Invest in Gold? We buy gold for the same reasons that we buy insurance – because the risk of significant loss of wealth makes it the wise and prudent thing to do.

There are a great number of reasons that gold has to continue rising, and these are the top three:

#1 Growing global demand and limited supply.

According to data published by the World Gold Council (WGC), gold demand fell by 53.1 tonnes to 1097.6 tonnes in the first quarter of 2012. Over that same period, however, combined jewelry and investment demand in India fell by 83.1 tonnes due largely to a new tax on gold jewelry and increases in the import duty on gold. The jewelry tax has now been repealed.

Demand outside India actually rose by more than 3.2%, a significant portion of which is due to steadily increasing purchases by the world’s central banks. Mexico’s first quarter purchases totaled 18.2 tonnes and the Philippines’ central bank took in over 31 tonnes in March alone. Russia, Kazakhstan, and Ukraine have also stepped up purchases considerably.

New gold production, meanwhile, is reaching its limits. The 5% increase from 2009 to 2010 fell to 3% in both subsequent years. With India back in the game and central banks buying ever greater quantities of gold, demand has already outstripped new production. Furthermore, the protracted period of depressed prices has backed gold mines into a corner. If prices don’t rise significantly they will have to curtail production to force prices up to a point where they can operate profitably.

#2 Currency is not backed by gold.

All western fiat currencies are in trouble. Fiat money is nothing but an IOU, redeemable only in more of the same. The supply of dollars has doubled over just the past four years, which in the absence of a corresponding increase in demand means the dollar’s value must fall. Central banks are well aware of the risk, which is why they are scrambling to replace their dollar-based reserves with gold.

Gold’s purchasing power has been remarkably consistent over millennia, so its price in terms of any declining currency must always rise. That is exactly what has been happening over the past 10 years, as is clearly evident in this chart comparing the gold price to the dollar index:

Gold vs Dollar Chart

#3 Gold counters inflation.

It follows from the previous that the gold price will rise as inflation erodes the value of the dollar. According to the official headline consumer price index (CPI) we have seen a cumulative inflation of 30% over the past 10 years, compared to 87% in the 1970s. But the numbers are misleading.

Prior to 1980 the government employed a different method to compute the CPI, one that realistically reflected the increased cost of living for the average American. Since then, however, it has used a method to produce more favorable appearing – but far less realistic – data. Using the earlier method, accumulated real inflation since 2000 is well over 160%.

This chart illustrates the credibility gap between the official and real inflation rates:

Annual Consumer Inflation vs SGS

Courtesy of ShadowStats.com

Inflation is nothing more than the flip side of a failing currency. Real inflation is the ever growing number of dollars it takes to pay for the things we buy every day. Wage increases and interest rates, however, are tied to official inflation. The difference is wealth lost forever, and gold investment is your best protection against it.

Why invest in gold? Simply put, to save your wealth from going down with the dollar.

Knowledge is your best weapon in uncertain times, and that’s what this tutorial is all about. To begin we will take a brief look at the various gold investments commonly available today.

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