This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

4 Reasons Gold Remains a Safe Haven

2. Currency Debasement

The most popular reason to own gold is as a form of money. The theory is as paper currency loses value, gold will retain its purchasing power, making it a safe place to preserve one's wealth.

"Gold is a very different investment than other commodities," says Ash. "The fact that it has been used as a store of wealth for centuries ... is 5,000 years old."

Historically, gold has traded in opposition to the dollar 32% of the time, according to data from Standard and Poor's. A weaker dollar makes dollar-backed commodities like gold cheaper to buy in other currencies, which strengthens demand.

As central banks dealt with the financial crisis by pumping lots of cheap money into the system, they created a nasty side effect: inflation.

China's inflation is at 6.5%, India's is 9.22%, the Eurozone is dealing with 2.5%, the U.S. at 3.6% and the U.K. is at 4.4%.

The only tool central banks have to fight inflation is to raise key interest rates, something they have to do very carefully in order not to choke off growth. But here's the rub, inflation is rising faster than interest rates, creating a perpetual negative real interest rate environment (interest rate minus inflation), which means your dollar in the bank is worth less. As paper currencies lose value, gold shines as a store of wealth.

Underscoring this fiscal tightrope are ballooning debt issues in Europe. After almost two years, the fate of Greece is still uncertain as EU members try to shore up the European Financial Stability Fund by letting it buy government bonds and by increasing its money pool.

But even the strong countries are getting weak, as the weak get even weaker. Germany reported growth of only 0.1% in the second quarter. If the country propping up the Eurozone falters, who is left?

Many think that the European Central Bank, which is already buying government bonds, will have to inject more liquidity into the market, despite inflation fears. The ECB has already raised interest rates twice this year to fight rising prices.

The U.S. is also joining the debt battle. Although Congress passed a debt ceiling increase, a 12 member group from Congress has to agree to $1.5 trillion in spending cuts by the end of the year before the debt ceiling gets its second increase for a total of $2.1 trillion. The U.S. grew only 1% in the second quarter and only 0.4% in the first, both well below estimates. High debt and anemic growth leave little wiggle room.

The economic situation is deteriorating so fast that the Federal Reserve is contemplating another round of quantitative easing. Although three voting presidents are ardently against pumping more money into the system, other presidents are already advocating for a third round of quantitative easing, or QE3. Fed Chairman, Ben Bernanke, has now extended the Fed's September meeting to two days to debate this issue.

"Government money printing undermines the fiat currency of the dollar," says Young. If QE3 is off the table, or if Europe stabilizes, then gold could suffer says Young, but he doesn't see any bright spots for the EU and thinks Bernanke will have to commit to some kind of QE3.

The U.S. is currently more than $14.6 trillion in debt with $412 billion in interest payments due in the past 10 months fueling rumors among doomsayers that the dollar will eventually be worthless.

"Intrinsically, the dollar is worth nothing. It's a dream painted on a piece of paper," says Rick Rule founder of Global Resource Investments. Rule predicts higher gold prices in the future because the U.S. dollar will eventually depreciate in value. "There's no particular reason why you, despite the fact that you live in the U.S., need to be a prisoner of the dollar ... use gold money, export your capital."

The dollar is also losing its mojo as the world's top currency. BRICS countries -- Brazil, Russia, India, China and South Africa -- have said that they are looking for a broader international reserve currency structure not so heavily reliant on the U.S. dollar. China is in fact conducting business in local currencies with Russia, Argentina, and soon Brazil. Continued lack love will push the dollar lower and send gold higher.

Stock quotes in this article: SGOL, IAU, GLD, WFC, UXG 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs