Is gold investment good for everyday investors? The big names say it should be 10% of your portfolio. And it should be used as a hedge against inflation. But do you really need it? Robert Kiyosaki and Peter Schiff are experts in gold investment. And they shine some light on why you need gold in your portfolio. Along with some key points on the history of gold, inflation and gold investment.
Here are the sections of the topics covered in this article. Simply click on these quick links to jump ahead.
What Is Inflation and Why Does Gold Help Against It
Any investor will tell you that Gold is a good hedge against inflation. This means that Gold will increase in value as the stock market declines. That is why you should buy gold to protect yourself against stock market fluctuations. It is recommended that 5-10% of your portfolio should be in gold. This sounds reasonable but not everyone does it. So why should you?
Inflation in the economy is bad. When inflation increases the value of money decreases. When inflation goes up, interest rates go up to bring inflation down. A recession could be the ultimate way to get inflation under control. And a recession could happen as a byproduct of increasing interest rates too high. It’s a convoluted system where gold is used to offer some relief against rising inflation and falling stocks. But first, let’s understand why inflation is bad.
Why Inflation Is Bad
Inflation is bad because you can buy less with your dollar. As prices on everyday items go up, the value of your dollar goes down. Inflation is triggered by Governments that introduce (or create) money that goes into the financial system.
So can’t you just money print your way out of inflation? No, you can’t because if more people have more money, it increases the cost of things. As more people with more money are buying the same amount of items available to buy. So naturally, the laws of supply and demand kick in, and prices increase.
Inflation, interest rates and recessions are all out of your control. You cannot control it, but you can protect yourself from it. This brings me back to gold and why it is a good investment against inflation.
Why Gold Investment Is Good
The value of gold rises as the stock market declines most of the time. But why is it worth having gold regardless of the stock market movements? The answer is because Governments can print dollars but they can’t print gold. We have to earn gold just like everybody else.
That is why prominent gold investors like Robert Kiyosaki says “Gold is God’s money” and paper money is “Fake”. Investors like Kiyosaki and Schiff don’t believe in the modern monetary system. Paper money is “funny money”. You need to invest in real assets, like real estate or precious minerals to keep the value of your assets. According to Kiyosaki, “The world changed on August 15 1971, when Nixon took the dollar off the gold standard. And paper money lost its real value.
What is the Gold Standard
The gold standard is a monetary system where a country’s currency or paper money is directly linked to gold. Nixon took the dollar off the gold standard in 1971. This was a temporary measure that is still in place to this day 50 years later.
In the late 1960s and early 1970s, the US Government was running into huge deficits. This was because of the Vietnam war and other Government programs. The Federal Reserve was doing Quantitative Easing (QE) and monetizing the deficits.
Foreign creditors found that if they wanted to redeem their dollars for gold. There wouldn’t be enough gold available for the transaction. From that point, the gold standard was abandoned and the Fiat currency was introduced.
What Is a Fiat Currency
After being taken off the gold standard, the US and most countries in the world use a fiat currency.
A fiat currency is not attached to the price of a commodity such as gold or silver. The value of fiat money is determined by an authority like a Government that decides the value of that currency. And the value is based on the public’s faith in the currency and its issuer, that country’s government or central bank.
Unfortunately, these institutions are losing the confidence of the people. They continue to make mistakes about inflation and interest rates and bank bailouts.
Why the US Dollar Is on the Verge of Collapse
Without the gold standard, any currency that is not directly linked to gold will lose it’s value. This means that Governments can flood the market with money whenever it’s needed. For example, the US created $13 trillion in new money, which is a 35% increase in paper money in circulation. One third of the money in the US was created in the last 2 years. This level of money creation is not good for the economy and Peter Schiff believes that the system is on “the verge of an implosion”.
“I think this system is now on the verge of an implosion. And I think we’re going to see, relatively soon where the dollar now collapses, and the world returns to the gold standard, just without the dollar. When the world was on a dollar standard, it was because the dollar was not only backed by gold but redeemable on demand into gold. And after the US defaulted, the dollar lost a lot of value in the 1970s. About two-thirds of its value relative to the Deutsche Mark, the Yen, and Swiss Franc. But it continued to serve as the reserve and it’s the reserve currency to this day. I think that status is what’s in jeopardy.”
Why You Should Invest in Real Assets (Like Gold)
The main problem here is holding paper money. Inflation, interest rates and recessions are all tied to economic factors. These range from the availability of money, to stock markets built on low-interest rates and free money. If you listen to Kiyosaki and Schiff, holding gold isn’t a temporary hedge. It’s part of a mindset to hold tangible assets as there is long term value in holding them. To protect yourself from inflation and devalued currencies, Peter Schiff suggests…
“Divest yourself of US dollars and dollars on assets and buy some real things. Such as foreign stocks, property, gold and silver. You have got to get out of paper and accumulate assets. Real assets. Actual things that have real value and that can generate real income.”
Prepare Your Portfolio For a Dollar Crash
Kiyosaki warns that even worse than a stock market crash, is a dollar crash. This will impact everything and change the way people live. This doomsday scenario comes from 1971, when Nixon left the gold standard and now money is created when needed. Unfortunately, things could get worse in 2024 if the US releases a rumored Fed Coin. Peter Schiff offers some insights into what could happen next.
“That’s going to make the problem worse. That’s just going to make it easier for the Federal Reserve to create inflation. Because instead of creating paper currency, they just create digital currency. You have all these lunatics in Washington. They want to use a fed coin as a way for the Federal Reserve to put money right into the pockets of American citizens. They’re tired of quantitative easing for Wall Street, where the Federal Reserve prints money so that Wall Street bankers can get rich. They want the Fed to print money so that everybody on Main Street can get rich. But the problem is nobody gets rich by printing money. You’re just creating inflation.”
This scenario reinforces the thesis on devalued currencies and the need to hold an asset like gold. This will provide protection from any potential Government monetary schemes.
Final Thoughts
It’s important to know why gold is a good investment as a hedge against inflation. I’m a huge fan of Robert Kiyosaki and Peter Schiff, and their explanation of the history of the gold standard creates a context for gold and why it should be 5-10% of your portfolio. Past actions usually predict future behaviors. Governments won’t stop printing money or doing whatever is necessary to keep the economy going. It’s a complicated subject. The key point being gold is not just a hedge against inflation, it is an asset that is a long-term store of value.
The next step is to decide how an everyday investor should invest in gold. Do you hold physical bars or buy into an ETF, or buy into virtual bars held on your behalf? That is next on my exploration of the topic.
Let me know what you think below. Thanks
M. Moneyman
