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There are five primary reasons why investors should invest in gold.

1. As a hedge against “inflation” or currency devaluation (a declining dollar).
2. As a safe haven in times of geopolitical and financial market instability and crises.
3. As a commodity, based on gold’s supply and demand fundamentals.
4. As a easily redeemable store of value which retains it’s worth.
5. As a portfolio diversifier.

Gold is a precious metal of significant monetary value whose price is determined by inflation, by fluctuations in the dollar and U.S. stocks, by currency-related crises, interest rate volatility and international tensions, and also by increases or decreases in the prices of other commodities. The price of gold reacts to supply and demand changes and can be influenced by consumer spending and overall levels of affluence in the society.

Gold differs from other precious metals such as platinum, palladium and silver because the demand for these precious metals is also determined by their industrial applications. Gold is produced primarily for accumulation or cosmetic value, while other commodities are produced primarily for consumption, although they are also used as a store of value. Gold’s value does not arise primarily from its usefulness in industrial or consumable applications, but from its use and worldwide acceptance as a store of value.

In contrast to other commodities, gold does not perish, tarnish or corrode, nor does gold have quality grades. Gold mined thousands of years ago is no different from gold mined today. Therefore, gold existing in the “above ground gold” stock or minted gold is interchangeable with newly mined gold.

The early 1980’s presented an once-in-a-lifetime opportunity to buy stocks. Today, economic and political conditions appear to offer a similar opportunity in tangible assets. The macroeconomic and political landscape has not looked like this since the hard asset bull markets of the 1970’s. The problems plaguing the stock markets only make it for desirable for investors to accumulate hard assets.

The recent global economic and financial market climate is looking increasingly precarious. Financial imbalances have never been greater following an extraordinarily lengthy period of easy money. Many countries have experienced housing bubbles and massive increases in leverage, and global trade imbalances are at unprecedented levels. Rising U.S. interest rates and high oil prices now threaten to push the system to a breaking point.” (BCA Research)

Like today, the 1970’s were a time of huge budget deficits, loose monetary policy, soaring oil prices and the open-ended costs of war. Today, the combined costs of fighting the war in Iraq and fighting terrorism at home could match the 12% of GDP that the Vietnam War cost.

In the coming decade, as the dollar suffers one of the great meltdowns in monetary history, gold will reclaim its place at the center of the global financial system. Gold’s value, relative to most national currencies, will soar. “When East Central Bank buying outstrips West Central Bank selling, and it will in the not-too-distant future, the other remarkably bullish fundamentals for gold will take over and drive the gold price to levels that most people can scarcely imagine today.” (John Embry, Investor’s Digest, March 4, 2005)

Tomorrow we shall look closely at the five primary reasons for investors to own gold. They may never be more relevant than they are today.

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