Sometimes inflation comes like a shock wave. All at once, in a crippling fashion, rather than slowly over time.
My uncle told me a cautionary tale about that over a cup of strong espresso earlier this week. It reminded me why we need to own gold.
I’m currently in southern Italy, a relatively poor area of the country. My uncle lived here all his life. He’s watched the quality of life rise and fall through the years. However, when Italy joined the European Union, there was a massive wave of inflation.
As the country shifted from the lira to the euro, things got bad for his way of life.
Things that he used every day doubled in price. Mostly it was food. For example, he told me that the price of mussels, which Italians call cozze, doubled in a few months after they switched to the euro. So did bottled water, cheese and many other daily staples.
According to my uncle, it caused a wave of gold sales.
Insurance Policy Against Catastrophe
You see, the Italians use gold as a store of value. They see it as an insurance policy against catastrophe. And when the country joined the EU, it triggered the emergency. The lira plummeted in value, but gold did not.
Many families in the area sold their gold to ease the transition. It hurt, but not as much as it would have without gold.
Unfortunately, this isn’t a common idea among Americans. Many of us understand saving for a rainy day, but we do it with dollars. That could be a critical mistake.
Imagine if the value of the dollar plunged. We see it sometimes with the price of gasoline, because oil prices are global. But imagine if the price of our groceries doubled overnight…
It would be a disaster.
Many families would need to make some hard choices — do I pay the mortgage, or do I eat dinner?
That’s what happened to many families in Italy.
Why We Hold Gold
However, we have an opportunity today. We can buy gold and hold it in our trading account. Gold is still well below its 2011 high of $1,900 per ounce, as we can see in the chart below:
The price of gold must rise 46% to break through that old high.
But that’s not why we hold gold. Gold is important as a hedge against unexpected disasters. And the U.S. could easily see another financial disaster in the future.
Microsoft co-founder Bill Gates told an audience recently that the U.S. will face another financial crisis on par with 2008. He doesn’t know when, but he is sure that we will. That should be enough for anyone to own an insurance policy in gold.
Owning gold these days can be simple. The Sprott Physical Gold Trust (NYSE: PHYS) is my favorite way to do so because we can redeem shares for physical gold. There is a simple registration process that gives shareholders a numbered account of actual gold.
There are many “paper” gold accounts, which are exchange-traded funds (ETFs) that hold gold. However, these funds don’t allow shareholders to see how they handle the gold. We must just take their word for the ownership. On the other hand, Sprott holds inventoried, physical gold.
An Excellent Insurance Policy
It is important to own some physical gold in a safe-deposit box as well — something that we can get to in an emergency. However, shares of physical gold in a brokerage account are another excellent insurance policy.
The Sprott Physical Gold Trust gives us the ease of holding gold in a brokerage account and the security of actual, physical gold.
If you haven’t put money into gold yet, or are looking for more exposure, that’s a great way to do it.
Editor, Real Wealth Strategist
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