In times of economic recession, one of the most likely actions to be taken by any government is to devalue the currency by printing more money and putting more cash into circulation. This of course in time, results in inflation, which means the pound or dollar in your pocket is worth less. If it gets out of control then hyperinflation may also occur as witnessed during the Weimar Republic, Zimbabwe and Argentina in recent years. Gold (and to a lesser extent silver) has, on the other hand, offered a reasonably effective safeguard against inflation because when the value of currency goes down, the value of gold and silver has traditionally risen, or at least maintained the same purchasing power over the medium to long term. Whilst in recent times and since 2011 this has not appeared to be the case, many argue it’s because either inflation has not occurred yet (i.e. we are still in a period of deflation), or that the price of gold and silver is manipulated.
Many gold and silver enthusiasts predict global financial collapse in the very near future. They frequently quote the ‘quadrillion dollar derivatives fiasco’ and the huge individual country debts which, in a number of cases, far exceed that country’s annual GDP. This view, to be fair, is also gaining some credence amongst other financial commentators who are not necessarily ‘gold and silver bulls.’
It is therefore believed by many, that in the event of an economic collapse or a currency collapse, physical gold and silver provide the ultimate insurance policy.
So, let’s summarise some of the main reasons why anyone would consider investing or saving in gold and silver:
- You can maintain your purchasing power whilst inflation steadily rises.
- You can safeguard your savings against currency devaluation.
- You can protect your portfolio and wealth in the event of an economic downturn or banking crisis.
- You have no counterparty risk with gold and silver (contrary to paper assets where there is always a counterparty risk involved).
- Gold is an Effective Diversifier: The price of gold is determined by economic forces that are different from those that affect other financial assets, such as stocks, bonds, treasury bills and real estate. In fact, the forces that govern the price of gold are very often in direct opposition to the forces that control other financial assets. In other words, the price of gold tends to move in the opposite direction from the price of stocks, bonds, treasury bills and real estate. This makes gold an effective diversifier and it helps reduce portfolio risk.
- Gold is Highly Liquid and Portable: Unlike most other financial assets, it is extremely easy to convert gold into cash. Without any difficulty or delay, gold can be bought and sold 24 hours a day and trading spreads are relatively narrow.
- Gold is a very Private Investment: When you invest in gold, your purchases are relatively confidential are not subject to mandatory government reporting (depending upon the amount purchased) like stocks and real estate. Plus, you can easily incorporate gold into your IRA or SEP account.