As a value investor, I have never seriously viewed gold as a viable long-term investment. After all, once it's mined, it sits there either in bars or in jewelry. Unlike oil, the quantity of gold doesn't deplete regularly over time. However, there is an important lesson to be learned over the years, one that stems from Charlie Munger's wisdom to "invert, always invert." (For more, see Warren Buffett: The Road To Riches.)

IN PICTURES: World's Greatest Investors

Full Faith and Credit in Gold
The U.S. dollar is a fiat currency, meaning that it is backed by the full faith and credit of the United States. While the U.S. still remains the most credit-worthy nation on Earth, its credit worthiness is being put to a test.

The proof is in the pudding. At the beginning of 2009, the yield on the 10-year Treasury note was approximately 2.4%; today, just six months later, the yield is just about 4%.

A nearly 160 basis point move in just six months is huge in the Treasury market. It means that the U.S. Treasury has to sweeten their terms to continue to stimulate demand for U.S. securities.

Treasury buyers, mainly China, need to be induced to continue buying U.S. debt - an implication that Treasuries may be losing a little luster. As the U.S. continues to print more and more money to stimulate the economy, this trend is likely to continue. (To learn more, check out our Inflation Tutorial.)

Expanding Balance Sheets
It's not only the U.S., but balance sheets of central banks all over the world are growing at a rapid pace as countries attempt to spend their way out of this global recession. Inflation can be defined as simply too much money and not necessarily too much money chasing few goods.

There are plenty of goods in this world. But money supplies are increasing at a rapid clip and at some point such expansion will have an inflationary effect. Don't count on inflation anytime soon; the world still has lots of deleveraging to work out. However, inflation is but one catalyst that will stimulate the demand for gold. A deteriorating loss in confidence in central banks is also a very serious threat.

Follow the Smart Money
Some serious hedge funds are betting on gold. John Paulson, who made a fortune betting against mortgages back in 2006, is making a big directional bet on gold. He is known for showing up early and profiting handsomely. According to an SEC filing, Paulson has nearly $3 billion of his $9 billion hedge fund, invested in the SPDR Gold Trust (NYSE: GLD), an ETF that simply owns physical gold.

Another $100 million is in South African gold miner Anglogold Ashanti (NYSE: AU). Another $550 million is in Kinross Gold (NYSE: KGC) and $200 million is devoted to Gold Fields (NYSE: GFI).

In all, Paulson has nearly $4 billion invested in gold. That is a huge directional bet on one thing: that the gold price will be much higher years from now. And I don't think he is betting on gold just getting to $1000 an ounce either. Investors can easily diversify into gold by looking at the Market Vectors Gold Miners ETF (NYSE: GDX).

The Bottom Line
In a market littered with many uncertainties, gold shines as a safe haven. The entire global economy is suffering from an unprecedented global credit crisis. Another small hiccup could send gold soaring. A chance to protect your portfolio from this serious threat should be investigated. (For more, read 8 Reasons To Own Gold.)

Related Articles
  1. Mutual Funds & ETFs

    Top 4 Asia-Pacific ETFs

    Learn about four of the best-performing exchange-traded funds, or ETFs, that offer investors exposure to the Asia-Pacific region.
  2. Investing

    Procter & Gamble Restructures, Sheds 100 Brands

    All businesses face adversity, and Procter & Gamble is no exception. We take a look at recent developments affecting this global giant.
  3. Mutual Funds & ETFs

    Top 3 Japanese Bond ETFs

    Learn about the top three exchange-traded funds (ETFs) that invest in sovereign and corporate bonds issued by developed countries, including Japan.
  4. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  5. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  6. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  7. Professionals

    Top 5 Highest Paid Hedge Fund Managers

    Understand what a hedge fund is and why hedge fund managers make so much money. Learn about the top 5 highest paid hedge fund managers.
  8. Investing Basics

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  9. Investing News

    Glencore Shares Surge in Hong Kong

    Shares of Glencore International, a leading multinational commodities and mining company, jumped by around 15% on London Stock Exchange, after the shares had gained about 71% earlier on the Hong ...
  10. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  1. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  2. What do hedge fund analysts do?

    A hedge fund analyst primarily provides support to a portfolio manager on how to best structure the hedge fund's investment ... Read Full Answer >>
  3. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  4. What are the risks of annuities in a recession?

    Annuities come in several forms, the two most common being fixed annuities and variable annuities. During a recession, variable ... Read Full Answer >>
  5. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  6. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!