Friday, June 12, 2009

Inflation Protection – Part 2 – Gold

During every commercial break on television and radio you hear ads from companies offering to buy your gold jewelry or sell you gold coins. “Experts predict gold will double!” “Gold is the perfect way to diversify your portfolio.” “Now is the time to own gold.” Is it all hype or hope?

If there is an extended inflation, the price of commodities will inevitably rise. Gold and silver have thousands of years of history as a reliable store of value. When people are worried they feel better holding gold.

There are many ways to participate in the markets for gold and silver. You can buy and take physical possession of gold jewelry, gold coins, or gold bars (bullion). You can buy gold ETF’s (Exchange Traded Funds) that give you part ownership of a store of gold bullion in a bank vault somewhere. You can buy the common stock shares of gold mining companies. Or, you can buy shares in mutual funds or ETF’s that specialize in gold, silver, and platinum mining company shares.

Which method you choose to connect to the gold market depends on your comfort level with stocks and mutual funds and on just how bad you think things might get.

Personally, I don’t think the economy will collapse leaving the survivors reduced to subsistence farming and barter. I am convinced, however, that inflation is coming sometime in the next three years. As a result of my conviction I’ve invested a portion of my retirement fund in a precious metals mutual fund.

I find physical gold too awkward to buy and sell or to use as money. I thought about buying gold ETF’s but in the end I settled on a mutual fund that invests in gold and silver mining companies.

I’m content with my choice. It pays dividends and annual capital gains distributions and it is leveraged to the price of gold. The underlying mining company stocks go up faster than the price of gold goes up; they will also go down faster if the gold market turns down.

My way is not the only way nor is there a “best” way to own gold. This is a case where you must indeed “work out your own salvation with fear and trembling.”

Links to the Inflation Protection Special Report
Part 1 - The Need
Part 2 - Gold
Part 3 - Oil
Part 4 -TIPS
Part 5 - Consumer Staples
Part 6 - Commodities
Part 7 - Summary

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