A noted economist was asked in an interview recently what he was investing his money in personally. His answer, “Guns and gold,” may be an extreme version of what many people are feeling coming out of the worst recession in decades, but it’s really not that much of an exaggeration. It will take time to rebuild confidence in the financial system and investment markets, and it’s easy to find plenty of other reasons to worry. Gold is considered a safe haven. Although its value fluctuates, it’s a hard asset that should always have value, even in a doomsday scenario. Here are some reasons that many people are stocking up on gold in this environment.

-  Gold is an Inflation Hedge: Between the Fed, the Treasury, and Congress, we are seeing government spending at levels never been seen before. Billions of dollars have been pumped into the economy over the past two years and much of the planned spending hasn’t even started yet. With this kind of money flowing into the system, inflation is bound to become a concern at some point. Gold is an investment that has historically fared very well in inflationary periods.

- Demand For Gold Should Increase: The price of gold has been climbing steadily over the past several months. The prices of commodities like gold are based on supply and demand. Because there is a limited supply of gold, the price increases when demand increases. As an investment, gold should perform well over the next five to ten years as demand for the asset increases.

- Real Interest Rates Are Negative: If you think back to Economics 101, you’ll recall that the real rate of interest is one that factors in inflation. With interest rates on savings accounts, money markets, CD’s, and other cash alternatives at historic lows, the real interest rate for savers is negative. Most savers aren’t excited about this fact, but some are finding value in buying gold. It’s an investment they have confidence in, and feels as strong, or stronger, than cash as an investment right now.

- Geopolitical Concerns Persist: The U.S. faces several threats of violence from nations around the world and although there is hope that none of these threats will be carried out, it wouldn’t take much for a country like North Korea to dramatically change conditions around the world with a simple push of a button. Unrest is expected to continue, a condition that no one cheers for but one that supports a high price for gold.

The most common way to own gold is in the form of one-ounce coins. These are fairly easy to find and also fairly easy to liquidate down the road should the need arise. The downside is that coins can be lost or stolen, so safeguarding them is a must. If you’re not concerned about owning the hard asset but you want to benefit from the price increase of gold, there are now exchange-traded funds (ETF’s) that track the price of gold to the penny. Most investors aren’t abandoning their entire investment strategy and putting everything in gold, but a five to ten percent allocation is a great fit for most investors.

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Tags: Gold, inflation, investing in gold

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