Inflation, inflation, inflation…. that’s all we ever hear about these days. It’s in the financial news, it’s in the newspapers, and people are even talking about it on the street corners. Okay maybe not on the street corners, but still inflation is incredibly important and you need to hedge against it so that it doesn’t wipe out your investments over long periods of time.
Many people don’t understand what inflation is. Basically it is just a term we use for the general price increase of everything over time. Think about like this… last year I was able to buy the coolest basketball shoes available for $140. This year I went to buy the current seasons coolest basketball shoes and they cost me $150.
That is inflation. The price had gone up $10 in the last year for basically the same item. Whenever a government prints more money, which the US government has been doing in the last year and a half to try and fight the recession, inflation always always always ensues. Inflation is simply a function of an increase in the money supply.
So how do you hedge against inflation? How do you make sure that your investment portfolio isn’t worth less and less money in real terms year after year? One way to do it is to invest in gold. Historically speaking gold has been an investors best insurance against both inflation and deflation.
It is sort of common knowledge, or least commonly held knowledge, that gold will usually increase in value during inflationary periods.
There’s an old saying and I don’t remember the exact wording of the saying but it goes something like this… 1 ounce of gold has always been able to purchase a good suit of clothes. This has generally held true, just think about it today while gold is trading at about $1,000 an ounce.
A thousand dollars will buy me a “sort of okay” suit. It won’t be a great suit, but it also won’t be a generic suit off the rack at a department store either. Why does 1 ounce of gold always buy a suit of clothes? Because gold is a hedge against inflation; gold keeps its value over time whereas dollars do not, just as my example about the shoes illustrated above.
How much gold should you hold in your portfolio? That’s a question everybody has to ask themselves and it will be determined solely on your own risk aversion and your own portfolio mix. Land and property values tend to rise with inflation as well so if you have a lot of property in your investment portfolio you may not need as much gold. On the other hand if you don’t own any property including your own home, you may want to beef up your holdings in gold.
We don’t like to think about it, but the fact of the matter is governments come and go. We think that America is different but the sad truth is… we’re probably not all that different. Heck, even today we can see that China is quickly closing in on us in the race to become the world’s financial power.
And even though governments may come and go, one thing has remained steady throughout the entire history of our planet, and that is gold.