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Honest Money: Gold

April 11, 2012 | Comments: 0 | Views: 139

Let's face it. Gold is honest money. Unlike fiat money (paper money), which we all use - backed by the FED, gold's value isn't backed by a "promise to pay." The value of gold is real, it cannot be changed via inflation or monetary policy or at the whim of some politician. As a commodity with intrinsic value, gold has survived as a currency for thousands of years throughout history, while most paper money created over that time has disappeared.

As any numismatist can tell you, currency created via government decree (fiat money) has, historically, a way of disappearing. The US dollar, the world's reserve currency, has only survived as long as it has due to the fact that there is consensus over how to trade oil: only in U.S. dollars.

Should the world decide that oil can be traded in other currencies or bartered away, then it will no longer be considered the world's reserve currency, and will likely disappear due to the enormous amount of debt the United States of America has taken on to combat the downturn in the economy.

Unfortunately, as currencies lose value, the wealth denominated in those currencies (read US dollar) also obviously diminishes. In order to allow your wealth to maintain the ability to pay debts some of your wealth must be allocated to a money that doesn't diminish due to speculative and political forces. More often than not, history has taught us, that money is gold, and in some cases silver.

Even when currencies do well, gold as part of an investment portfolio is still a valid investment strategy. Just in the past 15 years, we've seen equities hit three peaks followed by three devastating declines. As the equities have hit bottom, in all three cases, the price of gold has soared.

So a valid investment strategy would be to purchase gold as part of a portfolio, along with equities to hedge any market risk present in the equities. Then once equities decline, as they cyclically do, one could wait for the rise in the price of gold. Once the price of gold soars, it would make sense to sell some of that gold to purchase equities near their bottom.

Step two might be to wait for equities to bounce back accompanied by a decline in the price of gold. Once equities have bounced back and some of the luster has gone out of owning gold, one could sell some equities and purchase gold.

A portfolio balanced in this way takes advantage of the age old adage: Buy low, sell high. At, small cap, undervalued gold stocks are often featured as part of a regular investment column.

Sy Lewis has been specializing in small mining companies since 1992 and believes that fiat currency will soon have to reconcile with commodities. Working out of Beverly Hills he frequently writes his opinions in an electronic paper called AmericanMiningTribune at

Source: EzineArticles
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