With the recent turmoil in the economy and stock market, many investors are asking themselves if they should be investing in gold. To answer this question, one needs to first look at what gold actually is: a commodity.
A commodity is a raw material that is used to create products that consumers want or need. The primary use of gold is in the production of jewelry. Similar to the vast majority of discretionary consumer goods during tough economic times, the current demand for gold jewelry is significantly weaker than normal. However, gold has other important attributes that make it appealing from an investment perspective. Gold provides a hedge against inflation and a declining dollar, and provides protection during a general economic slowdown. Since gold is a storable commodity, most investors buy gold, not for its glitter, but for its ability to retain value.
Unfortunately, as with all investments, gold has its drawbacks. First, since gold is a “store of value” instead of an “income generator,” it does not produce income like a stock or bond, it simply stores value. Additionally, it must be stored somewhere, which has a cost. If it is not stored safely, it can be easily stolen or lost.
Henssler Financial generally advises against investing in gold, not because it is a poor investment option, but because there are more efficient alternatives if inflation, a weak dollar or a general economic downturn are the primary concerns.
To protect against inflation, we recommend utilizing inflation-protected securities such as TIPS (Treasury Inflation-Protected Securities). TIPS are not impacted positively or negatively by inflationary forces since the principal is tied to inflation. To guard against a weakening dollar, we suggest investing in the common stock of multinational corporations that derive a substantial amount of revenue overseas. Therefore, when the local revenue is repatriated back into dollars during a declining dollar environment, the corporation’s bottom line will get a boost in dollar terms. Lastly, to protect against an economic downturn, we advise adhering to our “Ten Year Rule” investment philosophy. Under the Ten Year Rule stocks will not have to be sold at depressed prices, as 10 years worth of liquidity in fixed-income securities will be in place to meet living expenses.
For more information regarding this topic, please contact Henssler Financial at 770-429-9166 or [email protected].