As the stock market has meandered through peaks and valleys in recent years, gold has continued its rapid upward ascent. This has not gone unnoticed. On the one hand, we are bombarded by ads from companies urging you to invest in gold (by purchasing from them, of course). On the other side of the equation, everyone is offering to buy your gold jewelry – even the ugly and broken pieces. I must admit that I’m a bit confused at seeing both types of ads – is this a time to buy gold or sell gold?

So I have to ask myself – should I invest in gold?

It has often been said that gold tends to keep its value in a down economy. But why is this? As I see if, gold has two things going for it.

  1. It’s pretty
  2. It does a good job of conducting electricity

Obviously, the price of gold isn’t driven by its ability to conduct electricity. Certainly gold jewelry is pretty, but should this be the sole reason to pay more than $1300 per ounce?

There is another reason, of course. As gold enthusiasts will tell you, for thousands of years, people have used gold as currency – long before the advent of paper currency (this is the old argument of “this is how we’ve always done it in the past”). After all, you can always print more money, but you can’t make more gold. While that statement is literally true, it’s misleading. While the amount of gold existing in the world cannot be increased, the fact of the matter is that we don’t know how much exists. We know how much exists in the marketplace, but this can be increased by mining for gold. Is there a mother lode in the midst of the Amazon basin, just waiting to be extracted?

If the world economy was teetering on the brink of collapse, how valuable would gold really be? The basic necessities of life are food, water, and shelter. Gold provides none of these. Can you trade gold for these necessities? Sure – as long as your trading partner values gold more than food, water, or shelter.

Why, then, does gold continue to rise? I believe that it’s not because gold is intrinsically immune from economic downturns, but merely that a large number of people have convinced themselves that gold is immune from economic downturns. There’s a term for this – a self-fulfilling prophecy.

The “buy gold” advertisements tend to fan the flames a bit more. At some point, we’re going to reach a point where all of the believers have bought into the gold bull market. What will happen at that point? Will the bubble burst?
Invest in gold if you wish, but I urge you to keep an open mind and ask yourself what, exactly, is driving the demand. I can understand using gold as one aspect of your portfolio, but it might not be wise to put all your eggs in one basket.

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Kosmo is the founder of The Soap Boxers and writes on a variety of topics. Many of his short stories have been collected into Kindle books.

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