Page 28 - Introduction to investing in Gold

The Beginner's Guide to Investing in Gold
you’ll still pause. Use your experience and decide whether what you’re about to do actually makes sense.
Inflation & Interest Rates
I’ve put these two together to illustrate a point – let me give you an example. If inflation is running at 10%, interest rates are 5%, and you borrow money, the lender is losing purchasing power. The money they’re lending is losing 10% of its value each year, but they’re only receiving 5%. Not good business.
I can’t imagine they’ll be very happy with that, so there are three things they’ll probably do:
1.Make sure the interest rate is at least equal to inflation.
2.If inflation is rising, they may want to build a buffer in.
3.Make some money, so charge a margin on what they lend you.
Keeping the numbers really simple, if inflation is 10% and it’s growing, they might view 12% as their break-even position (they’re assuming it will go higher). They then want to add a margin, so let’s say they lend at 14%.
That’s a lot more interest than we’re used to. Imagine what could happen to some property prices if that happened.
My point is really simple: you should consider an asset class where the market momentum is moving in your direction. If interest rates are going down, then leverage can really help you, but if they’re going up, they can really hurt. And if you do want to stick with leveraged assets (such as property), then build in that buffer in case interest rates (and, therefore, your debt) make holding an asset more expensive.
I appreciate some people may say, “I’ve got no debt, so it doesn’t matter”, but I would argue that it does because it’ll impact those with debt who are operating in the same market as you. The asset price often changes regardless of how it is financed.
Since gold is typically not a leveraged asset, it’s one I like in the current environment.
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