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Sunday, June 20, 2010

ONE SHOULD ALWAYS BUY GOLD

               Before the great depression most of the world used gold as a currency. Of course that did mean every time someone purchased something they paid for it in gold. Governments maintained a certain amount of gold in their vaults & paper currency was issued against the value of that gold. (In INDIA, the minimum reserve worth Rs.200 cr should be maintained at any point of time, out of these reserves Gold reserves should be worth Rs.115 cr @ Rs.94/10 grams & Forex reserve of Rs 85 cr at current market price. If actual reserve are more than minimum reserve RBI may prints new currency notes & issues them to deficit banks in form of loans against gold, foreign exchange, promissory notes & treasury notes) So every time you pay paper money you effectively using gold. This system was “Gold Standard”. Citizens also had freedom to exchange these currency notes for gold, as and when they deemed fit.

               Government ensured that no more notes are printed. The reason was simple if they had to print more money they needed more gold in their vaults, because every paper currency note out there was essentially gold. And if citizens got slightest hint that the government is printing currency, they would all land up at the bank to exchange their paper currency for gold. So even if government were tempted to print money they would think twice before doing it.

               Now, during the time of great depression, growth was a problem, unemployment was at its peak. Firms were shutting down. One way to create growth was the government printing notes & giving it to people in various ways to spend. Once the citizen got some money in their hands, they would go out and spend it. This ensures that they buy goods & services. And one man’s spending is other man’s income and so the cycle would continue and this would create some growth. And that’s what government did; they moved out of Gold Standard and went into FIAT Currency i.e. a currency that does not have anything backing it but basically the fiat of government. This gave them the free way to print any amount of money they want to.

               In fact, in the year 1933, US government confiscated all the gold that its citizens had through Executive Order 6102 signed by the then President Mr. Franklin D Roosevelt, forbidding the hording of gold coins, gold bullion & gold certificates by US citizens. They were off course compensated for their gold at the rate of $20.67 per troy ounce (1 troy ounce=31.1grams). So because of this the government across the world had freedom to print currency whenever the economy was in trouble. And as per basics of economics, an increase in supply leads to decrease in purchasing power. That’s why economists who follow the Austrian school of economics, say that all paper currencies over a period of time go back to their intrinsic value i.e. zero.

               So that is why when ever there is a hint of major financial crisis, people figure out that almost any solution that the governments might come up with will ultimately ends up to printing more & more money (which US is doing to solve its financial problem, and Europe cant due to its structure). This means decreasing purchasing power. Smart money in this situation always moves to gold. As it is now, people end up treating gold as nothing but what it was always used as i.e. CURRENCY. One should always have at least 25 % of its portfolio in Gold in order to hedge inflation .

Always buy gold in parts a SIP Systematic Investment Plans, or go into Gold ETFs....
Some of the GOLD ETFs are -
GOLD BeES (I prefer this as it is the first ever launched, more experienced and of huge gold deposits)

READ MY POST ON US PRINTING MORE NOTES

GOLD PRICES PERFORMANCE

Gold Price Performance Silver Price Performance

16 comments :

  1. NICE ONE WELL SAID......

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  2. In the above list Gold BEES ETF price is missing..can you pls add it.

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  3. HI
    THANKS for reading my post the GOLD BEES ETF price is added its just below UTI MF & above HDFC GOLD, the only things is that its name is not properly displaying see it is blank but its rates are reflecting...
    SORRY FOR INCONVINCE I WILL TRY TO RECTIFY AS SOON AS POSSIBLE
    VISIT AGAIN

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  4. In 1973, Gold held by US central bank was 8,584 tonnes & currency in circulation was $61 billion. Dividing the gold held by the currency in circulation, we get a ratio of 140.2 for that year. i.e. 140.2 tonnes of gold was held per $1 billion of currency in circulation. In the year 2007, US central bank held 8,133 tonnes of Gold & the money in circulation was whopping $759 billion. The ratio comes to 10.7 .i.e. only 10.7 tonnes of gold held per billion dollars in circulation.
    If the US were to get back to the 1973 ratio of gold held per billion $ in circulation, it would have to increase its Gold Reserve to whopping 1,07,153 tonnes from current 8,133 tonnes, an increase of more than 13 times in potential demand. With the financial crisis not over yet, Central Banks like FED would continue to inject more & more money into the financial system. Thus the debasement of currency will continue, making real asset like GOLD & SILVER more & more attractive as a hedge against reducing purchasing power &amp (i.e hedge against INFLATION); loss of faith & confidence in paper currencies.
    We should thank GOD that US does not have a printing press for Gold. The YELLOW metal may be the only Savior of our wealth over longer term. That sure makes a case to buy GOLD.
    As far as our INIDA is concern, India’s M3 supply in INM3MS=ECI as on July 16,2010 was Rs.57,821.41 billion from Rs.56,770.76 billion (June 18,2009) & Rs.4984.46 billion on July 3,2009.GOLD RESERVE AS ON SEPTEMBER 10, 2010 – 557.7 tonnes.

    SO..GOLD IS ALWAYS A BUY EVEN AT THIS PRICES. BUY IN GRAMS IT SURELY WILL MAKE YOUR WEALTH SLOWLY BUT SURELY.....

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  5. thanx for the information.please discuss about siver invstment options..

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  6. pls tell where this GOLD ETF company is keeping gold....if US / EUROPE is again in crisis than they will again issue order and size the gold kept by GOLD ETF compnay

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  7. HI Anonymous,
    Thanks commenting on post.

    I can understand the concerns regarding the safety - but I can be sure about the safety of the gold with these ETF's - A custodian is appointed by the mutual fund company for safe keeping of the gold bought on behalf of the investors. The quality of the gold will be 99.5% pure which in other words means that it is 24 carat gold. The gold held with the custodian cannot be lent and will be fully insured.

    Friend , do visit again; add your self up - drop in ur email id on montyuu@yahoo.com for free post in your Inbox..

    Till than Happy investing
    BHAVIKK SHAH

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  8. nice post...however its not always easy to predict when will be the next financial crisis, if everybody knows about it..why thr will be one :)

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  9. HI NITIN,
    Thanks for visiting & commenting on the post..
    Yes no one can predict when the financial crisis will strike..but buying gold would definitely protect you from the financial disaster...
    Here I have tried to make my point on why one should buy gold is to get protected from the financial crisis..
    Do visit again...
    THANKS
    BHAVIKK SHAH

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  10. Is not there a chance that the price of gold might fall..than i will be in a loss..If i buy gold now n the market price for gold fall..please suggest..

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  11. Thanks for following my blog followed back yours.
    www.rumelatheshopaholic.blogspot.com

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  12. Gold has always proved as the best option for investment. and inclusion of gold in portfolio is must.Very nice post. Thanks for sharing information.

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  13. Hi Bhavikk, thanks for the kind words! Following your blog...great stuff! look forward to seeing you on my blog too!

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  14. Hi thanks for visiting and following my blog. Quite an informative post.Thanks for sharing.

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  15. Excellent article rightly depicts the real picture. One need to invest in Gold that too Trading in Gold is better option available. I too doing the same thing from years and got better returns mainly it protected me from inflation as it acts as a source of income. I feel that Gold investments will be much more profitable if approached in professional manner. So, i availed the service from #SquareIndia Advisory Pvt Ltd they provided me better service with their analysis. So, i suggest Investors/aspiring investors to have a look on #SquareIndia Advisory Pvt Ltd.

    ReplyDelete

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