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A World in Chaos...Buy Gold

Written by Greg McCoach
Posted August 18, 2006 at 8:00AM

DENVER, CO -- As we look around us, the world is becoming an increasing dangerous place. Whether it is a war, a rumor of a war, terrorism, corrupt government action, insane financial risk, fiat currencies, trade imbalances, or just man's inhumanity to man, the world is becoming increasing unstable, and less likely to sustain life as we have enjoyed it here in the western world for so long.

The situations in Iraq and Iran, the Israeli assault on Gaza and Lebanon, Sunni Muslims killing Shiite Muslims, and on and on it goes.

What this means to the western world is that oil prices are most likely to continue higher, because the most oil rich areas on the planet are in such disarray and chaos. These events can easily effect the supply demand equation for oil. To see why let's look at some facts.

The world produces roughly 84.5 million barrels of oil a day and consumes the same. Our economic world is totally dependent on oil. We cannot function without it. The current oil situation leaves no room for any serious disruption of supply because there simply is no inventory to draw upon.

While all this is going on, we also have two new factors that are greatly increasing the stress on the supply/demand situation for oil.

The first new factor is the amazing stories of China and India whose exploding economies are growing at rates of nearly 11% per year. Having been to China twice in the past year I can attest to this reality. At current growth rates, within ten years, China and India will demand more oil than the United States on an annual basis.

The second factor is "Peak Oil". Production in key oil producing nations is on the decline because most of the biggest wells are in the second half of their lives, which typically reduces the amount of oil that can be drawn for those wells. All of these factors alone spell trouble ahead without any additional problems from supply disruptions.

The bottom line to all this is that oil prices are going to go much higher!

With such a tenuous situation in the world oil market, gold becomes a great hedge against the financial risk that higher oil prices could bring. The chart below shows crude oil priced in gold going back to 1983.

(Click on the image to enlarge it.)

In the 1990's, an ounce of gold would buy 27 barrels of crude oil. Today it only buys 9 barrels at $630 gold. An increase in this ratio to let's say 16 barrels would mean a gold price near $1,200 an ounce for gold, or almost a double if you invest in gold now.

The importance of this chart and the lesson for us today is that gold appears to be a very wise investment at this point and represents good value in relation to crude oil.

How to Invest in Gold

There are several ways one can invest in gold including owing the physical metal itself, buying mining stocks, investing in the futures or options markets, or buying numismatic coins.

Out of these options, for most investors, owning the physical metal itself or select precious metals mining stocks is most appropriate.

Futures and options are not for the average investor and represent way too much risk. I also do not believe that the numismatic coin market is a good place to invest money. I see this market as mostly a rip-off except for those people who enjoy collecting old coins as a hobby.

The premiums charged by numismatic coin dealers are outrageous, sometimes 100% or more, and are hard to recover even when the market is doing well. When investing in physical metals, stick with bullion coins or bars from reputable refiners.

For the most part, each investor needs to understand the reasons they are investing in gold and see which option (s) is most appropriate for their circumstances.

If you want to own physical precious metals, I would recommend you purchase the cheapest physical gold or silver that you can get over the spot price that does not require a 1099 when you sell it.

For U.S. citizens there are items that are exempted from a 1099 when you sell them and thus offer you privacy from the government. Talk with a bullion dealer to get the details. Amerigold can help you with this discussion. You can reach them at 720-870-8021 or at their website www.amerigold.com.

When looking to invest in mining stocks, it is important to know how to evaluate the companies you invest in.

For the most part, investing in junior mining stocks is not for a novice investor. If you would like to invest in this sector, you should do so with the guidance of someone who truly understands this market and has had a successful track record for themselves and or their subscribers.

There are many good newsletter writers that can point you in the right direction. Don't just blindly invest in what they recommend. Do your own due diligence. Call the companies and ask to talk to management. Learn to ask the right questions to see if this company really has any real hope of making a discovery or developing a project into a producing mine. Consult with other people in the industry asking them what they think about such and such a company before investing your hard earned dollars. And don't put all you money into any one stock. It is better to play the percentages and take the money your willing to invest and spread it across several good choices. The odds that you will be successful move greatly in your favor by spreading the risk over 5 or more choices.

The junior mining sector can be explosive at times and all you really need is for one or two or your picks to take off. Even if the rest of your picks do little, nothing, or lose you some money, your overall portfolio can perform well if you have a winner or two.

The basic question for each investor when investing in gold is risk. For those who want less risk, owning the physical metal can make more sense, while those looking for greater returns of 200% or more may opt for the junior mining sector.

For myself, I like recommending both the physical metal and select mining stocks in combination as an investment.

The futures and options markets can also offer tremendous upside potential, but are only recommended to very experienced traders because of the statistics that state that 90% of all investors lose money in those markets.

With the changing world we live in, and the risk that investors are faced with, gold is one of the surest ways to protect what you have worked so hard in your life to achieve and accumulate.

Buy gold now at the cheap levels it is being offered. A few years from now people will look back at $600 gold and $12.00 silver as an absolute steal!

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