In my last post I talked about how the price of gold could very well go up significantly this year.
Goodness knows, there is a ton of uncertainty out there.
Here’s just a partial list of the things that give investors and risk assessment managers the shivers…
– The market meltdown in China
– The fall in oil prices
– The crash in commodity prices (also about China)
– Shrinking economies among emerging markets
– Saber rattling between Iran and Saudi Arabia
– North Korea and its missiles and bombs
– Serious concerns about the European economy, for plenty of reasons
– Confusion and concern among overseas investors over the upcoming U.S. presidential elections
(That last point is something I’m going to address separately and in detail in another post.)
The point being, markets hate uncertainty.
Uncertainty equals risk.
And right now we are living through a time where the number of risks out there are more numerous than ever.
As for which will prove to be the trigger that shoots gold prices through the roof, nobody knows. And my guess is that a significant rise in gold prices won’t be the result of any single factor or event. It will be the result of a cascade of events.
Disasters and sudden change rarely happen as the result of a single event or point of failure. Whatever the calamity – whether it’s a plane crash, ecological disaster or an implosion on Wall Street – it occurs as a result of an unforeseeable collection of multiple events.
With so many risk factors in play around the world right now, the likelihood of a deadly cascade is higher than ever.
And when it occurs – particularly if the U.S. dollar takes a big hit – the price of gold will rise.
I don’t buy gold in anticipation of a sudden rise in value. In fact, I don’t even buy gold as an investment. Sure, I try to buy low. But gold isn’t in my investment bucket. It’s in my insurance bucket.
It’s not in my investment bucket simply because I don’t view it as a terribly good investment. It doesn’t pay a dividend. It doesn’t rise in value as a result of sound management – like a company’s stock does. And it’s incredibly hard to predict its ups and downs in price.
But I do view gold as a great way to mitigate risk. Insurance, if you will.
I insure my home against fire and theft. I hope I never have to make any significant claims against that policy. But it’s there if I need it.
I buy and own gold for the same reason.
I would hate to be in a position where my investments and cash holdings had taken a deadly plunge in value.
But of that happens, I can fall back on my gold.
And here’s a big plus for you.
If my house burns down and I have to claim what I can from my insurance policy and rebuild, the sum I can get from the insurance company is fixed.
But if world stock markets crash, or the value of the dollar plummets, or a major war breaks out… or if all of those events occur at once… then the price of gold will almost certainly rise dramatically at the same time.
Gold prices are sensitive to any major crisis.
This makes it the best insurance ever. Because its value goes through the roof at the time you need it most.
You may take a different view, but for me I don’t buy gold as an investment. I buy it as an insurance policy on steroids.
About the author: DH Kenrick is a student of world economics and a committed gold enthusiast. Follow me on Google+
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