Investing in Gold: The glitter of the yellow metal

I have received a few emails from the readers of my blog asking me questions with regards to investment in Gold. I shall henceforth write a series of articles on investment in Gold and why does gold investment make sense in these times.

Yesterday during a discussion, my friend told me that Gold has run up to a very high level and people who invest now are never going to make any reasonable profit. It is true that Gold has rallied significantly from the levels it was at since 2000. However, in spite of its spectacular rally, I do not think that the rally of Gold is over or that an investor would face crippling losses if they buy gold at these levels. And it is simply because the reasons that caused gold to rally are still there. Those reasons are:

1. There's no magic to money. It works as a medium of exchange and a store of value when and only when its quantity is strictly controlled. With the burgeoning budget deficits in countries around the world and most notably with USA’s 12 trillion dollar deficit, the Federal Reserve will have to end up printing more money (if the government has to honor its commitments to pay interest on the treasury bonds). Reckless printing of money would destroy its value and you would see a much devalued currency. That's what's nice about gold. Its quantity is controlled by nature herself. People have been trying to get around it for centuries. Alchemists labored long and hard to turn base metal into gold. None succeeded. The only way you can increase the supply of gold is by mining it - which is expensive and time consuming.

In the 19th century, paper money was backed by gold. People had learned their lessons in the panics and bubbles of the 18th century. They didn't trust pure paper currencies. Lincoln fiddled the dollar during the War Between the States - inflating the currency to pay for the wars, but it was put right soon after. Apart from that, for the whole period - from the beginning of the 19th century to the creation of the Federal Reserve in 1913, the dollar was stable and reliable; people trusted it because there was real money - gold - standing behind it.

But now, the chief of America's central bank (Ben Bernanke) says that gold is not the best form of money; the dollar is supposed to be money now! His desperation is obvious considering the situation USA is going through now. If dollar loses its status as the preffered currency - its going to be all gloom & doom for USA. And now, the feds don't worry too much about how many dollars they issue. Their primary goal is no longer preserving the purchasing power of the dollar - it's lost 95% of its value since the Fed was set up. Now, they're more concerned with the stock market, with the housing market, with consumer spending, and with the next election!

2. The second reason as to why I feel Gold would continue to rise is due to factors local to the world’s largest importer and domestic consumer of Gold – INDIA. Gold – since time immemorial has been hoarded by Indians. During marriages, the bride is adorned in gold and gold is gifted to the new couple. Gold consumption in India goes up significantly during the marriage season. With more than 50% of Indians below the age of 25, the next decade would be a real boom period for wedding planners & of course gold merchants in India.

3. Chinese citizens had been forbidden from hoarding or saving in gold beyond a certain limit till a few years back. With these restrictions lifted, the world’s most populous country is also going on a gold buying spree.

In spite of these factors in favor of gold, like any other commodity, gold prices could dip and rise because prices depend largely on consumer sentiment. However the long term prospects of gold seem bright and the glitter of the yellow metal would continue to attract investors looking for a safe haven for investment for a long time to come.