Gold as a Hedge Against a Declining U.S. Dollar and Rising Inflation
Posted on April 26, 2008 in the Investing category
.The thought that gold has preserved wealth is very vital these days in an economic environment where investors deal with a declining U.S. Dollar and rising inflations. The rise in inflation in the economy is due to increased commodity prices. If we look at history gold has served as a hedge against both of these scenarios, which are occurring today. As inflation rises gold will generally appreciate. When investors come to the realization that their money is decreasing in value, they will begin to position their investments in a type of hard asset that has, usually, maintained its value. The 1970’s is a perfect example of how gold prices will increase, while inflation is on the rise.
The main reason that gold is the beneficiary of a declining Dollar is the fact that gold is priced in U.S. Dollars around the world. There are two reasons for this. One, investors who want to buy gold, such as central banks, have to sell their Dollars in order to make the transaction. This will drive the Dollar lower as investors from around the world want to diversify their way out of the Dollar. Two, is the fact that with a weak Dollar it will make gold less expensive for investors that are holding onto other currencies. The result of this is a greater demand from investors that have foreign currencies that have appreciated, in relation to the declining U.S. Dollar.
The Safe Haven of Gold
It does not matter if it is tensions in the Middle East, Africa, or anywhere around the world, it is becoming more obvious that both political and economic uncertainty is becoming a reality in the world we currently live in. Because of this investors usually see gold as a safe haven when there is both political and economic problems around the world. The reason for this is that throughout history there has always been the fall of empires, currency collapses, and political coups. At these times investors who kept their gold were protecting their wealth and assets. Because of this whenever there are problems in the world, whether they be economic or political, many investors will buy up gold, as they see the precious metal as a safe haven that will always hold its value.
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