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Is Gold a Hedge Against the Perils of Interesting Times

While paper-based investments and real estate are vulnerable to effects of changing times, gold soars. An investment in gold may save a portfolio when all else fails.

The old Chinese curse, ômay you live in interesting times, has particular relevance to current U.S. history. There is a lot going on right now, much of it scary. Major investors around the world are responding to current events by sinking their major currencies into gold, silver and palladium. Big financial institutions like the Central Banks of Russia and China are also leaping onto the metals bandwagon driving the price of these precious commodities ever higher.

This is spurring a gold rush not witnessed since the 1970s. Many financial experts now view gold as an island of stability in a stormy paper-based investment market, a development that bodes well for ordinary folks who want to bolster their retirement with a precious metals hedge.

Old Reliables Unreliable

Investments once considered as stable as granite are rapidly losing ground. Real estate is one example being cited. Long praised as a solid investment by money gurus, home-buying is no longer viewed as a sure path to profit. High pricing and the possibility of increasing interest rates are putting pressure on the current housing bubble, factors bound to hurt the market sooner or later and drive the overheated real estate market into recession.

The housing bubble will burst rather than gradually deflate, as higher interest rates negatively impact not only the health of the housing market but other economic segments as well. The stock market takes a hit because higher rates make it more costly for companies to pay for debt. Higher rates hurt corporate profit margins and reduce stock value, bad news given the deep debt situation so many companies are in today.

Paper is PassΘ
The U.S. dollar has lost more than 80% of its original value since the early 70’s when the U.S. went to a floating currency, a situation not helped very much by the debut of the Euro in the late 1990s. Unlike American dollars, a portion of the Euro is gold-backed, a feature that has helped it outperform the dollar over the long haul. For this reason many foreign investors have been taking money out of U.S. dollars and putting it into gold instead.

Gold prices are climbing right now because the Federal Reserve is printing dollars in flood proportions to keep the real estate market afloat, this is creating inflation, which erodes purchasing power. India and China are spurring gold prices as well. India is the worldÆs largest gold-consumer, and the Chinese government is actively encouraging its citizens to buy gold.

All are encouraging signs for gold investors. Over the course of the past 45 years, gold has climbed in value from a modest $35 an ounce to over $1200. Contrast that with the battered U.S. dollar, a currency currently worth only 20% of its value in 1970.

Now is the time to buy gold because when interest rates go up, downward pressure is exerted on real estate, stocks and bonds and commodities like gold tend to increase. The opposite occurs when rates travel from a high to a low. ThatÆs the time to reduce gold assets and increase the paper part of a portfolio.

Buy Without Getting Burned

A diversified metals portfolio made up of palladium, silver and gold will be able to earn an above-average return and greatly increase the overall value of your assets safely.

It is probably best for the first time investor to begin conservatively by purchasing physical metals instead of gold stocks, which can be very volatile. When metals gain 20%, gold equities jump by fifty or sixty per cent. That’s great when it happens but the reverse can occur as well.

Buy gold bars or coins, and put them in a safety deposit box. If you chose to purchase coins from a coin shop, make certain you pay the lowest price possible and check that they have a buy back policy. If you elect to go with a broker, fees will be inevitable because you are purchasing a tangible commodity.

Work with established companies, five years in business is good, ten even better. DonÆt bother with firms that badger you with telemarketing offers or apply high-pressure sales tactics. Avoid paying high commissions. Some brokers have layers of fees, through which they earn more money then they do when investing on behalf of customers.

Check references and Better Business Bureau ratings. Deal with a company that takes an active interest in doing business with you. World Financial, for example, offers a five-star customer satisfaction guarantee. A financial advisor’s job is to ease the investment process, and to insure that customers get the most for their money. Good advisers are merely good, but the best are worth their weight in gold.