What should be your real reason for buying gold?

November 20th, 2006

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Speculators are always in the market. Where speculators congregate, there will be herd behaviour, mob rule and rumours. Late last year, gold pierced the psychological US$500 market, which heralded in a ‘gold rush,’ culminating in a short-term price bubble of around US$730 in May this year (see our article, The story of gold). After the bubble burst, the gold price, till today, remained trapped in volatile range.

The aim of these gold speculators was to make as much money as possible in the shortest possible time. When they saw the price of gold moving up with great momentum, they joined in the party, resulting in a dangerous price bubble. Since they did not care about understanding the underlying value of gold that they were punting their money on (for hedge funds, it is usually other people’s money), the only reason for them buying is because the price was going up. As investors, we prefer to invest, not bet. When we look at gold, we perceive it differently from the gold speculators.

At this point in time, the gold price is still in a long-term uptrend. There is a good reason for it?its underlying trend is a big hint to us that something amiss is going on in the global currency system. Thus, as we said before, the root reason for investing in gold lies in your confidence (or rather, the lack of) in the fiat currency system which the world is using right now. And we would like to repeat this point again: the ?money? that we commonly use everyday is the fiat paper currency, which has no intrinsic value because it is not backed by anything physical (e.g. gold). Such ?money? can be conjured up at will by the central bank?s printing press. Thus, its value merely lies in everyone?s confidence in it (see our previous article, Gold & Oil, hand-in-hand).

Thus, your real reason for investing in gold is not to ?make money??you do so as a hedge to preserve your wealth.

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