Gold Vs. Inflation: Factors to Consider
You might think that you're doing a good job putting money away for retirement or a rainy day. If you have been setting aside money every time you collect a paycheck or generate income from your business or investments, I congratulate you. You're doing something that the vast majority of Americans are not doing. You are saving up for the future. Once again, congratulations. However, you have to understand that putting away money is just the first step to a bright financial future.
If you are just saving money and not doing anything else, you are doing yourself a great disservice. Why? There is a thing called inflation. Inflation is the number one enemy of your money.
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Inflation reduces the number of goods and services your money buys year after year. You would be surprised as to the kinds of things one dollar could buy two hundred years ago. You could buy land with one dollar two hundred years ago -- not anymore! That's how bad inflation is and guess what? You might have saved away one thousand, ten thousand or even hundreds of thousands of dollars but given enough time, all that money is not going to be worth much in the future unless you do something against inflation.
What can you do to protect your money against inflation? Very simple, you need to invest your money. Simply putting away money and storing it in the bank is going to ensure that your money will rot with time. You have to fight inflation by increasing the value of your money so that at least it keeps up with inflation.
If inflation is at four percent a year, your money should go up in value at least four percent a year. In other words, what is worth one thousand dollars now should be worth one thousand dollars in the future if you invest your money right.
One of the best places to invest your money if you are looking to fight inflation is gold. Here are the factors to consider when sizing up gold versus inflation:
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1) Gold is proven against inflationary forces
The funny thing about investments is that you have to look at them comparatively. The value of an investment cannot be accurately determined just by looking at that specific investment and not referring to something else.
Investments are by definition comparative so if you are looking for a way to invest your money so that your money grows in value over time, you need to look at different investment vehicles that you can compare to each other.
When it comes to inflation, gold is very powerful. Gold versus inflation yields a solid track record for gold. If you were to look at gold's past performance when there are inflationary spikes not just in the United States but in South America, Europe, Africa, Asia and other regions, you would see that people flock to gold when the local currency crashes.
If the local stock market crashes or the local economy tanks, people always flock to the safety of gold. Why? Gold goes up in value when paper money goes down in value. When the economy goes down, gold goes up. If you are going to look at gold versus inflation like a boxing match, inflation gets knocked out by gold every single time. It's not just a question of gold keeping up with inflation, no. In many cases, when you see massive runaway inflation, the price of gold spikes up a lot more than the increase in inflation.
If you play your cards right, sizing up gold versus inflation ends up with you far ahead of inflation. You just need to make sure that you buy into gold at the right time. Of course, the best time to buy into gold is when there is very little inflation. Once inflation starts picking up, you can see that the price of gold would start going up as well.
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2) Gold versus real estate
When trying to determine gold versus inflation rates, you probably have been reminded that real estate is also a good hedge against inflation. This is true. The price of real estate goes up a few points above the inflation rate. If the inflation rate in your area of the world goes up to ten percent, you can be sure that the price of real estate would go up to twelve percent. This is the iron rule of rule estate economics; it always goes up a few percentages above and beyond the rate of inflation.
There's a simple explanation for this. While we can create all sorts of goods and offer all sorts of services, land will always remain in fixed supply. As the population grows, the demand for land grows. As more and more people settle a piece of land, there's less land to go around. This is why real estate will always go up except for certain times where there is a speculative bubble. The last time this happened was of course, in 2008 when the price of real estate and credit markets just crashed but these are historical rarities. These are fairly rare.
In most cases, real estate continues to go up. Sure, it may go up in small increments, it may go up slowly, but it will always go up.
So in terms of analyzing gold versus inflation, does it make sense then to skip gold and just invest in real estate? Absolutely not! While it's a good idea to diversify part of your portfolio, you have to understand that real estate has certain problems.
Suppose you are trying to understand the relationship of gold versus inflation and are thinking of using gold as an inflation beater. In that case, you have to understand that real estate as a comparative investment option suffers from serious problems. The biggest problem that real estate has is that it's not liquid.
With gold, you only need to show up at a precious metals dealer, bring your gold with you or your gold certificates and you can walk out quickly with cold hard cash in your hands. With real estate, you have to wait maybe six months to a year depending on local market conditions for you to unload your real estate.
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So is Gold the Best Bet Against Currency Inflation?
In many cases, if there are a lot of people panicking in your area and just getting rid of their land holdings because their stock holdings burned to the ground, the real estate market in your area might be temporarily depressed.
You know that your real estate holding is worth money and will definitely protect you against inflation, but this is cold comfort in your calculation of gold versus inflation. Why? You'll have to wait a year or more to unload your property. In many cases, if you want to unload your property quickly, you have to sell it at a loss. This is why when analyzing gold versus inflation, real estate and other alternative beating inflation like art collecting just doesn't hold up. If you are serious about waging war on inflation and are really trying to get an advantage when analyzing gold versus inflation, your best bet is to go with gold.
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