why Invest in Gold & Silver?
We explore the reasons why many experts see gold & silver as such an essential investment at this point in time & how you can go about investing in these precious metals.
This site is aimed at beginner’s who have perhaps not studied much financial information or economics before, or have previously found (like me) that much of the information was way over their heads. I will try to keep it simple and still give a balanced overview. This means only including the key points so those of you who wish to know more will find the recommended reading useful. Successful Investing!
Why invest in gold & silver?
1) Security & Maintaining value of wealth
The traditional reason is for security during times of financial turmoil. And most people would agree this is indeed one of those. Many countries are bankrupt or on the verge of bankruptcy– Iceland, & Greece are a few examples. Some only being propped up by bailouts from neighbouring countries & most of those neighbouring countries are not in much better shape themselves!
Government debt is out of control for virtually every country & continuing to get worse since without the governments printing more money the whole economy would collapse. Printing ‘money’ or in this case ‘currency’ means currencies are being devalued so the true value of our money is reducing. This is the process of inflation.
So where does gold & silver fit in?
Gold & Silver used to be money in its own right. In fact up until 1971 all currencies were backed by physical gold and silver. This meant that any person could take any currency note £, $ etc. to a bank and exchange it for physical gold or silver. This arrangement was known as the Gold Standard. Just as an example, It meant that if there was $100 million in circulation then the amount of physical gold & silver = $100 million. The governments & other institutions (see Conspiracy of the rich for details of the other institutions) did not like this arrangement however because there was a restricted amount of gold & silver on the planet, which meant that the amount of currency that could be created and therefore traded between countries was limited. This meant they were unable to grow their economies in the way they wanted to & make themselves richer.
So after 1971 currencies were no longer backed by gold but instead were backed by 'the promise' that a countries government could back their currency. This type of currency is called a 'fiat currency' and is based purely on faith. If you look at a £10 note you will see written ‘Bank of England I promise to pay the bearer on demand the sum of £10’. This important development meant that an infinite amount of money could be created as there was no longer any physical limit. The US in particular started printing alot of money mainly because their country imported far more than it exported – a term known as a ‘trade deficit’. It would be equivalent to a household spending double what it earnt every year for 30 years and wondering why they were in debt!!
Talking of debt, since the end of the gold standard, money has been 'created' by a bank every time a loan or mortgage is taken out. For every £100 that the bank has deposited with it, the bank is able to 'create' & loan out another £900! This in turn devalues the true value of the notes already in circulation (Inflation). Hence prices appear to increase eg. property prices, food prices but in reality our buying power is reduced.
In contrast Gold & Silver maintain buying power. As fiat currencies are devalued the value of gold & silver increases in fiat currency terms. This is what has been happening for the last 6 years with gold & silver.
History shows that whenever 'Fiat Currencies' have been used in the past the same situation has occurred. More and more notes are created until eventually the note is worth zero! Currency devaluation brought about the downfall of the Romans & in Weimar Germany in the 1920’s a normal wheelbarrow was worth more than the hundreds of fiat currency notes contained within it! For more details see Rich Dad's Advisors: Guide To Investing In Gold & Silver 
Nobody is sure whether we will end up in a period of ‘Hyperinflation’ or whether we will just continue with Inflation. Or perhaps a solution to this situation will be found but meanwhile the experts are insuring that they have some currency invested in the ‘real money’ where there is a finite supply so it cannot be inflated, and therefore their buying power is kept high & the true value of their wealth maintained. That 'real money' is Gold & Silver – both of which have been in a bull market (up market) since 2004 & in that time gold has increased by 354% from £240 to £850 per troy oz(as at 13 Oct 2010)
Silver meanwhile has increased by 370% from £4 to £14.80 (as at 13 Oct 2010). Please bear in mind that silver tends to be more volatile in price than gold. The main reasons being that there is less silver available in the market than gold so the price is more easily influenced. Also silver is an industrial metal and so its price can move in unison with the stockmarket.
Despite this however, although gold is the best known store of wealth and form of security, many informed investors feel that silver will end up being an even better investment than gold, for the same reasons above. They feel that as there is less silver available and silver is a necessary component in manufacturing of solar panels, photography equipment etc. The true value of silver is more than gold is currently selling for. For more information about this see Rich Dad's Advisors: Guide To Investing In Gold & Silver
2) For Capital Gains
Both gold and silver seem to be in a bull market at the moment. However this doesn’t mean their price goes straight up and never falls. Like any market their price still goes up and down to some extent. However the long term trend is up. If this the first time you are investing I heartily recommend that you study some graphs to see what I mean, because it is in these peaks and troughs that you can make capital gains. You will also be less likely to worry if the price should fall a little. For more information on investing for capital gains see my article Fundamentals of Investing
How do we know that gold and silver have not already reached their peaks?
A few reasons:
- The economy is still shaky and being propped up by printed money
- There is a set pattern for how a cycle works – where everybody and their dog is piling into an asset because they have finally been suckered in by the profit stories all those around them have made. Unfortunately at this point the said market is nearing the top of its bubble and it is too late. Eg. The stockmarket tech bubble of 2001, US housing bubble 2006.
- Although more buyers of gold jewellery are popping up, not many of the general public are investing in gold yet. How many people do you know that are?
- Many experts think that due to so much money currently being created, the prices of gold and silver will rise until
price of gold & silver x amount of gold & silver = value of currency in circulation
This is exactly what happened in 1980 when the gold & silver prices peaked at $800 & $80 respectively. Back then however there was far less currency in existence than today & the amount of silver in existence then was 10x more than gold. Hence the 10:1 gold, silver ratio.
In today’s situation estimates have been made of gold reaching $6000 to match current currency circulation and silver being at least equivalent to the gold price, if not greater as there is now less silver in circulation. Of course this is merely speculation and no guarantees can be made that this will happen.
Before embarking on investing in gold and silver you should think carefully whether it is the right investment for you and read as much information you can. The recommended reading titles I have suggested will help greatly with that decision. You may even wish to seek the advice of a financial advisor. Please be cautious who the advisor is though, as many advisors will only advise you on investments which they will earn commission on and gold & silver isn't one of them!
Whatever your take on the information I have shared with you, I hope you can see why so many educated investors believe they should have at least some currency invested in gold or silver or both.
