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Why Gold Should Be Avoided As An Investment Tool
Part 1 of 6
by James Nelson, originally published June 2007
This article is available in a printable PDF format. Just Another Jim highly recomends that you ditch the Adobe Reader, which is bloated beyond belief and loaded with "add-ons" that are little more than spyware, and use the FoxIt Reader for all your PDF needs. It's free to download and use!
NOTE: This article was originally written earlier this year for another website. It seemed appropriate to also publish it here. A chart of the U.S. Dollar Index is shown below. Since this article was written, the price of the U.S. Dollar has plunged dramatically and is now below the support line shown on the chart. For information on how the average person can legally own gold, see the end of this report.
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Owning gold is an exciting prospect. Gold has both history and mystery. Wars have been fought over it. Rumors and myths abound. Quite simply, there’s an aura about the yellow metal.
But it’s that very aura that makes gold hard to understand.
- Is it a currency?
- Is it a commodity?
- Is it just jewelry and bling?
Investing vs. Asset Protection
But before the nature and importance of gold can be fully appreciated, we have to consider the difference between Investing and Asset Protection. The distinction will make more sense if we think of investing as "Asset Growth" and contrast that with "Asset Protection." Let’s begin by considering investing, or Asset Growth.
Actually there are a couple of different reasons someone might want to invest. On the one hand they may be looking for an income stream (also called passive income) or they may want to simply increase the value of the investment (savings). In case you’re confused, let’s describe how both can be done using very common investment tools.
Investing for Savings
If you purchase a three year Certificate of Deposit (CD) for $30,000 which pays 5% annual interest, with the interest accruing monthly, at the end of the term you will receive $34,699.59 back from the financial institution. In this case your savings rate would be 5% and assets would have grown by $4,699.59.
Investing for Passive Income
On the other hand, let's say your goal was for the $30,000 to produce monthly income. You could use Treasury Bills or Notes to accomplish this. For this example we will use three $10,000 3-month (90 day) T-Bills. To spread out the income stream you might buy a $10,000 T-Bill in January, another in February, and a third in March.
T-Bill rates vary from month to month, but let's assume that the interest rate is 5% annually. In this case you would receive passive income of $125/month for as long as you renewed the T-Bills, and as long as the interest rate remained at 5%.
You also purchase Treasuries at a discount. If we assume a 5% annual interest rate, a $10,000, 3-month T-Bill would only cost $9,875. And then, after three months you would be paid the full $10,000, for a profit of $125. So, if you purchased a $10,000 T-Bill in January, you would, in essence, receive your first $125 of passive income immediately, because you purchased at a discount.
The Passive Income Payout
But let's get back to our three T-Bills. In April the first T-Bill will mature, or reach its full value of $10,000. But T-Bills can be set up to automatically renew. So, in April the Treasury Dept will give you another $10,000 T-Bill, payable in July, and again, charge you only $9,875. The extra $125 will be deposited in your checking account, and you will have received your monthly passive income check. Since you have three T-Bills purchased in three consecutive months, this $125 payout will repeat every month. When you are ready to do something different with your money, you instruct the Treasury Department not to renew your T-Bills and you get your $30,000 back.
Review: Investment Income is for ASSET GROWTH
Investment instruments, whether government backed securities such as CDs and Treasuries, or stocks and bonds, or real estate, all have one or a combination of these two goals. They are a means of turning our assets into growth or income vehicles. In contrast, this is not the ideal reason to hold gold. Rather than an investment, gold functions best as an asset protection tool. But before we consider just what that means, we need to consider just what gold is.
Copyright © 2007 James E. Nelson (Just Another Jim). All Rights Reserved.
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