You Can’t Eat Gold – Then Why Should I Own It?
“Why should I own gold if I can’t eat it?” This is probably the most common reason why people don’t think they should own gold.
Gold, in general, is a safe haven asset. It’s something you should own for a worst-case scenario.
Gold is the answer to hyper-inflation, war, disease, disaster, or whatever crisis that can somehow steal someone’s wealth.
However, many people think, “If it’s a true disaster, then why should I own gold if I can’t eat it?” Or in other words, if things are so bad, then it’s probably better to own something that is going to help you physically survive.
Although this is a practical thought, it’s not really a realistic one.
Of course food and water are absolutely necessary to survive, but they’re not the only things that you will need in a true crisis. You need something of value that everyone understands and recognizes – gold.
In a scenario where gold becomes extremely valuable, this is usually because a fiat currency becomes useless. This exact scenario has played out many times throughout history, and it’s actually occurring right now in Venezuela.
“…triple-digit inflation has rendered the national currency, the bolivar, worthless. By this month the 100-bolivar bill, the largest note in circulation, was worth only 2 cents, forcing people to carry piles of them in order to make the most rudimentary purchases.”
This is a situation that many (fortunately) cannot comprehend. The thought of this occurring is literally out of the question. And that is why so many people get caught empty handed in a crisis such as Venezuela’s.
I don’t bring this up to strike fear, but instead to point out why gold is an important component to anyone’s portfolio.
The next logical question is “If there is a financial crisis, why would you sell your gold for worthless currency?”
In other words, if we were to look at the Venezuela example, why would someone sell their gold for worthless Venezuelan bolivars?
Well… you wouldn’t. And I’m going to show you an example below…
Let’s say you bought 10 ounces of gold, which would be worth around $12,000 USD right now.
Now, let’s say for argument’s sake, that gold goes to $10,000 USD per ounce.
That means you’d now have $100,000 USD worth of gold.
BUT, that $100,000 USD could be worth nothing. If inflation goes through the roof, then that money would be worth much, much less. Which is the whole reason why gold would go up.
When inflation, or hyperinflation happens people rush into safe haven assets. Gold is the classic example. This rush into gold will cause an incredible spike in the price, as a buying frenzy engulfs the metal.
So, if you’re holding gold then you are holding an asset that everyone wants. You bought low and now you can sell high.
The problem is that you don’t want to sell for a currency. You’d essentially be giving the gold away for worthless fiat paper currency.
Instead, you sell your gold for something else. Something obscure that most people aren’t thinking about.
Remember, when there is a buying frenzy, the average person just thinks about what everyone else wants. Gold is this example.
So, what are people not thinking about when gold goes through the roof?
Lots of stuff. Land, art, and collectibles are the first things that come to my mind.
Put yourself in someone’s shoes who will become desperate for gold.
Imagine you have a bank account full of some worthless currency. You suddenly realize that your savings are melting away into thin air because of inflation. You start to panic and look for some way to preserve your wealth. You notice people around you buying gold and you see the price of the shiny metal going up.
You jump in with the herd and try to buy some gold too. But you realize that you can’t even buy gold with your worthless currency.
Then, out of nowhere, some guy comes to you with a bunch of gold and says, “Hey, I’ll give you 10 ounces of gold for that beautiful Picasso painting you have on your wall.” (Or some other valuable collectible/art you possess. That’s one of the arguments for why you should include collectibles/art in your portfolio.)
You, being desperate for gold, immediately agree and make the transaction.
Fast forward about 5 years and the gold frenzy dies down and the world starts to come back to reality.
Guess what?
The price of gold goes down and that Picasso painting is worth a whole bunch more than that 10 ounces of gold.
Although this exact scenario is obviously unlikely, this is the general concept with owning gold.
It’s a hedge for your wealth. Gold gives you the opportunity to have something valuable if the shit hits the fan.
You just have to be savvy enough to sell (or trade) your gold when the price goes up, so you don’t hold onto it when it declines.
The bigger idea here is crisis investing. The general concept is buy low sell high. And then do that over and over again. This strategy seems very simple, but it’s very hard. It takes a ton of guts and patience because no one else will be making the same investments as you.
You have to have a contrarian mind, where you are always thinking the opposite of someone else.
Speaking of contrarian mind… I’ll be sharing with you the best places to buy real estate for 2017 next week. And it’s not where you think.
