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The World Comes to Gold
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(September 29, 2001) Gold, the ultimate hedge against uncertainty, is gaining new respect today as a natural asset choice for the times we live in. For thousands of years, the commodity gold was money itself. Yet late in the 20th century, it was decided that "this time it's different," and gold was no longer needed. Today, with the world turned upside down, stocks swooning, and interest rates tumbling to 30-year lows, gold very much looks like a prudent bet.
Gold stands today as the forgotten element of asset allocation. Once the bedrock of money itself, gold now has a decades-long tradition of being ignored by financial advisors, trust officers, and, not surprisingly, stockbrokers. Not only have they been unlikely to recommend gold, but in the U.S., most of these fiduciaries don’t even know how to answer their client's requests for physical gold. For instance, at Onlygold.com, we have had people contact us who had asked their financial advisor about gold, and were referred to our website and told to "do it themselves."

“During the 1990’s, people didn’t feel the need to invest in things like gold bullion and gold shares. Why would they want to diversify away from the biggest bull market that anyone had ever seen?” Adrienne Roberts quotes one money manager in a 9/29/01 article in London’s Financial Times, “now diversification is looking a lot more attractive.”

A number of factors have converged that make gold a good bet at this point.

First off, since equities markets seem to have their best days behind them, and money market funds and bank CD’s offer piddling interest rate returns, gold seems to offer as good a chance as any for asset appreciation.

Also, gold is in essence different from other financial assets. Gold held in its physical form of bullion coins or bars is a measured amount of a rare, precious and desirable element - it is a thing in and of itself, and not the obligation of some other party. "And don't forget, gold is liquid, portable, and knows no geographical boundaries." George Gero, senior VP, Prudential Securities was quoted by David Bogoslaw in his article "Gold Futures Rally as Investors Seek Liquid Haven" in the
Wall Street Journal on 9/27/01.

Gold is also, most of all, a hedge against inflation. And consider the inflationary potential of the latest spending proposals coming out of Washington today: to bail out the airlines, beef up domestic security at airports and public facilities, put our military to work around the world, and stimulate the moribund economy. And in the proposed budget for 2002, Congress is looking at an over all 7% spending hike, and that doesn’t include the $40 billion emergency measure that President Bush and Congress recently enacted.

In addition, Alan Greenspan, Treasury Secretary O’Neill, and Bob Rubin met recently to consider an economic stimulus package for the slumping U.S. economy on the order of $100 billion. There’s no certainty yet as to the ultimate size of that package, but $100 billion is a pretty big ballpark.

"The dogs of war are not the only critters who have slipped the leash," Mitchell Daniels, director of the Office of Management and Budget was quoted by Thomas Donlan in the 10/01/01 issue of Barron's, "Ünder the guise of fighting terrorism, repairing damage, fighting recession, you could fit almost anything."

The biggest unknown cost is, of course, is that of our war on terrorism. Congress and the Administration have so far indicated a complete willingness to give the military whatever they need, to fight whatever sort of war we decide to engage in, until whatever desired goal is achieved. President Bush has promised a multi-year “crusade” to eradicate terrorism in the world. This may just be a bit of rhetorical saber-rattling, but it certainly doesn’t sound like something that can be done on the cheap.

To that, you can add the billions and billions of dollars of aid we are likely to promise countries that we are trying to recruit to join the U.S anti-terrorism coalition.

Inflation concerns aside, the global uncertainty factor is possibly the biggest thing motivating people to buy gold today.

Consider the shifts among nations that will arise in the weeks, months and years to come, all as a result of September 11th and the U.S. reaction to it. And these changes and rethinking of alliances and enmities will not just occur among Afghanistan, Pakistan, Iraq, Israel, Saudi Arabia and the rest of the Middle East, but among countries which make up of the majority of the population of the world. For instance, will the U.S. curry favor with Pakistan for their much-needed assistance, and will that be to the detriment (and resentment) of India? These two countries have been fighting between themselves for years, and both have nuclear capabilities.

Furthermore, Russia and China are also being called upon for assistance, and that will have long-range effects on our relations with these two world giants, and their relation one to the other. Also, how will that perhaps change their dealings with their Muslim neighbors at both their borders?

In short, you can hardly overstate the potentially unsettling domestic and global effects of U.S. reaction to the events of September 11th.

In times like these, defensive investors naturally turn to ownership of physical gold as a prudent hedge against the unknown.

Steven Strongin, head of commodity research at Goldman Sachs, sums up the investment strategy behind gold as quoted by Ms Roberts in the Financial Times article of 9/29/01:

“Tactical asset allocation is about what you think is going to happen. Strategic asset allocation is about a respect for error. I think anyone who doesn’t have a tremendous respect for error at times like these is making a mistake.”

 

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