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Money Coach

A Word or Two on Gold

What’s the best way to build a true, wealth-creating ownership investment portfolio?

Well, one of the first steps is to protect yourself with a small amount of gold.

Gold is a monetary asset. Virtually every central bank in the world has it or wants it. This is because gold is the oldest and most stable form of currency; yet if you were to ask politicians or central bankers if we should have a gold-backed currency, they would say “no.” If we did have a gold-backed currency, money could no longer be created out of nothing, and politicians wouldn’t know how to operate with an honest money.

Gold typically rises when the public faith in paper currency erodes. When the price of gold increases, it means that gold is gaining back purchasing power in relation to the declining value of the dollar. That said, don’t be fooled into thinking of gold as an investment. It should only be used as a hedge against something bad happening.

Here’s an example: Gold coins should be used in a worst-case scenario, so that if tomorrow you wake up and your cash, credit cards, and checks are worthless, you will have something (gold coins) to buy things with until the government comes out with a new form of money. Obviously, I hope this never happens, but investors should be prepared just in case.

I’ve done the same myself. The first investment move I made was to buy a handful of 0.10 ounce gold coins so I would have real spending money if the dollar collapsed. Shortly after that, I purchased a mutual fund of gold-mining companies, telling myself that the gold-mining fund was portfolio insurance and not an investment. Owning gold-mining mutual funds is a heck of a lot safer than choosing a couple of gold-mining stocks to own. Why? Because even I don’t know the difference between a hole in the ground and a real gold mine.

When I bought those gold coins and gold-mining shares, I actually hoped I wouldn’t make too much money with it, because wanting to make a profit with gold is like driving home in the hopes that your house has burnt down in order to collect the insurance. Think of it as Wealth Protection 101 -- the purpose of owning gold is to insure your portfolio and protect your wealth.

But gold is not without risk. With gold so easily manipulated by governments and money center banks, I tell investors not to speculate in gold. You are likely to get burned for reasons you never fully understand. I only own a little bit of gold as a hedge against an economic downturn - - a serious one.

Am I predicting that something terrible will happen to the US economy and the dollar? Not necessarily. But if a major recession or depression ever hits our shores, a scenario that is most likely come from the financial markets, my portfolio is protected by my gold hedge position. That's just common sense.

Published Jun 25 2007, 02:07 PM by moneycoach
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