It is not a matter of “if” the demise of the U.S. dollar is going to happen, but a matter of “when”. We have seen signs of its weakening in the last couple of years and it does not look like it will recover any time soon. The actions of a number of other countries are adding fuel to the fire and can only confirm that the best U.S. dollar hedge investment is gold.

The central banks of the world may have followed the U.S. in getting off the gold standard, and pegged their currencies with the USD, but not for much longer. They all know that a weak USD will affect their own financial systems if they are holding large reserves of the greenbacks. The only hedge is to dispose the USD and add real value into their monetary system by holding large reserves of the gold metal.

It comes as no surprise that countries like China, Malaysia, Indonesia, and Thailand are shifting from the USD. China and Japan alone own about $906 billion of the $1.1 trillion of U.S. Treasuries held overseas, so when they start to unload, it will only compound the situation.

“The U.S. dollar is no longer, in our opinion, is no longer a stable currency. It is devaluating all the time, and that’s putting troubles all the time. So the real issue is how to change the regime from a U.S. dollar pegging to a more manageable reference, say, euros, yen…” -Fan Gang, director of China’s National Economic Research Institute

The real story is not if these countries are switching from being pegged to the USD to another currency like the Euro that may be stronger. The truth can be found in reading between the lines in what these countries are actually doing. China for example, had hinted in late 2005 that they will quadruple their gold reserves and started to buy gold by cashing in 2.4% of its U.S. dollar reserves.

Not to be outdone, the central banks of Japan, South Africa, Argentina and Russia have jumped on the bandwagon in building up its own gold reserves. Russia said it would increase its gold reserves from 5% to 10% of its total financial reserves. When many of the world’s top economies are dumping the USD and increasing their gold reserves, it should be a big clue as to their lack of confidence in the USD.

Their hoarding of gold is an indication of what they believe will be one of the best protections against a declining USD. If an individual investor wants to hedge against the USD and diversify their own portfolio, who better to take the lead from then the central banks of the world?

So how exactly does an investor add gold to one’s portfolio? Well, there are a number of different ways on how you can invest in gold. The following is a list of at least six options that are now available for investors to choose from.

1. Direct ownership – Purchasing gold bullions or minted coins. There are disadvantages to buying gold in this form. Besides the costs of storage and insurance, there is normally a large spread between the bid and ask prices of gold bullions and coins.
2. Gold certificates – Some mints like Australia’s Perth Mint, has a certificate and depository investment program in which investors can own the gold without having the inconvenience and risk of self storage.
3. Individual stocks – An alternative to owning physical gold. You can buy stocks of established companies in the gold mining industry or take some risks with junior mining stocks.
4. Gold mutual funds – These funds usually holds a portfolio of large gold production or mining stocks.
5. Gold ETFs – Exchange Traded Funds trades like stocks on the stock market, however, these funds holds gold bullions as an asset. It is another alternative way for an investor to own gold. Two examples would be GLD and IAU.
6. Gold options and futures - Options allows the experienced investors a way to speculate on gold prices and is not recommended for the novice. The same goes for the futures market for gold. Futures are more complex and highly risky.

We can not predict when the USD will completely tank, but we do know that as the dollar declines, the price of gold will continue to rise. Consider this, it may seem a bit speculative, but inflation adjusted; the price of gold will have to reach $2000 per oz to match the high price it set back in the 1980s. At current prices, we still have some room to climb.

Additional gold resources:
http://www.kitco.com
http://www.gold.org
http://www.gold-eagle.com