If you are a gold trader, you’ll be watching the Comex gold futures contract numbers, and you’ll start fidgeting and worrying every time gold prices go up or down by a dollar or two.
If you buy gold mutual funds or ETFs, you won’t be as fidgety as the trader, but you’ll still be watching that price.
But owners of physical gold are a whole different breed.
For us, we are not buying gold so we can trade it and make money on ups and down in the price. Nor are we buying it in the expectation that the price will always go up, year after year.
We think in the same way as an insurance agent when he looks into the future before pricing a policy, by looking at actuary tables.
The agent selling health insurance wants to know what the chances are that a particular client will remain healthy over a given period of time. There are factors to consider, like whether or not the client smokes, how long his parents lived, and what his medical history reveals.
Owners of physical gold, in the form of gold coins or bars, create a similar kind of actuary table in their minds, or even on paper. They consider factors that are likely to impact the health of the world’s economy over the long term.
Here are some questions you might find on that checklist:
– What kind of growth are we seeing across the world’s major economies?
– How much debt is there in the system? And is it growing or shrinking?
– What is the health of the world’s major currencies?
– What are the chances of a significant rise in inflation?
– How susceptible are the world’s economies to a sudden and unexpected shock?
The answers to all of these questions are connected, of course. If inflation rises, for example, we can assume that our currency isn’t in great health either.
Also, the comparison with the insurance agent isn’t exact. We are the buyer, not the seller. We are looking to buy gold. But we do use that actuary table, or something like it. We are watching out for signs of coming “illness”, or pre-existing conditions. And we are looking for a kind of insurance, by buying gold, to protect at least part of our wealth against violent economic shocks.
In a nutshell, we are assessing future risks, and buying gold as insurance. The riskier the future seems, the more gold we buy.
With this mindset, we are no longer concerned with monthly ups and downs in gold prices. If prices go up, so much the better. If they go down, we shouldn’t be overly concerned. (Dips and corrections in prices give us good buying opportunities.)
And as owners of physical gold we can relax in the knowledge that if the world does come down with a major “illness”, our gold will almost certainly rise in value against our local fiat currency.
That’s why we buy and own gold.
About the author: DH Kenrick is a student of world economics and a committed gold enthusiast. Follow me on Google+
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