QE3 Changes Consumer Investment Strategies
Look at what gains value when the dollar loses value
Friday, September 21, 2012
If you are fortunate enough to have money to invest, or have investments in your retirement accounts, you may be wondering how the Federal Reserve's new round of Quantitative Easing (QE) will affect you.
It's generally agreed that, in the short run at least, it will reduce the value of the U.S. dollar. So if you have cash lying around, its value is going to go down.
Lots of things you can exchange for money, however, have already begun to go up in price. For the most part, only assets of a finite nature are being affected. If you buy a new car, for example, don't expect it to go up in price. The normal laws of automotive depreciation still apply.
But if you are invested in the stock market – especially if you are in the right stocks – those investments should go up in value, not necessarily because the underlying companies are increasing in value but to reflect the cheaper dollar.
Stocks of oil companies should do particularly well because oil prices are also rising in response to the Fed's QE3.
Gold on the rise once again
And then there's gold. In recent years gold has gone from being a precious metal to being an alternative currency. In recent months the governments of India and China have been heavy purchasers of gold as a hedge against the declining dollar. As the dollar gets weaker the price of gold goes higher.
There's more than one way to buy gold, of course. The commercials on cable TV for the most part only push what's called “physical” gold. With these purchases the consumer takes delivery of the actual gold – either bullion or coins.
Physical gold is favored by consumers who are pessimistic about the future, or in extreme cases, worried that the world is headed for an economic collapse. They want to make sure that when and if that happens they have something they can trade for life's necessities.
But assuming the world isn't going to end, buying physical gold may not be the best, most efficient way to obtain the precious metal. If you have an online brokerage account, you can purchase shares of an exchange fund based on actual gold assets or purchase stock in a gold mining company. Both tend to rise and fall with the price of gold.
If purchasing a gold mining stock however, there are other issues that could affect the price of the stock – just like the stock of any other type of company. If the mining company isn't well run, or has lots of labor issues, the stock could lose value even when gold prices are rising.
When buying gold coins there are also ways to lose. A coin has other value beside the gold that's in it. The dealer will sometimes mark up a coin more to reflect that perceived value. In other words, its possible to overpay for a gold coin.
Like any investment, talking with a trusted financial advisor is an important step. Independent research also is helpful.
But the status quote isn't an option. QE3 has changed the investing landscape. They don't call it inflation any more but the cost of a lot of important things are going up. Your investments should be one of them.
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