Should I Invest In Gold?

January 12, 2011

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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.

13 Comments (+add yours?)

  1. Lazy Man and Money
    Jan 12, 2011 @ 12:31:26

    I couldn’t help but notice the timing of this article and the one on SmartMoney –

    Break out the boxing gloves?


  2. Lazy Man and Money
    Jan 12, 2011 @ 12:32:14

    By the way, I meant to mention that I agree with this article completely.


  3. kosmo
    Jan 12, 2011 @ 12:40:27

    Of the 5 arguments made in that article, 4 of them seem to be reasons to not invest in currency – and not actual argument FOR gold. Those aren’t the only two options.

    The 5th point (and part of the 1st) basically make the argument that people like to have gold – with a key phrase being “For a growing number of folks, holding a bit of gold is a piece of security, something that will hold its value.” So it will hold its value because people feel that it will hold its value? For Linus, his blankie was a piece of security, but the price of blankets never skyrocketed to $1300/oz.


  4. The Angry Squirrel
    Jan 12, 2011 @ 12:50:53

    This post is brought to you by Goldline…


  5. kosmo
    Jan 12, 2011 @ 13:07:26

    Lol. I guarantee that at some point, gold related ads will appear. I make every effort to exclude them, but new ones always pop up (and, as a bonus. sometimes ads for silver). Most of the filters I have in place are for gold, silver, and soap (base on the URL, the SOAP boxers seems like a desirable site for companies selling soap to advertise on … but it really isn’t).


  6. Evan
    Jan 12, 2011 @ 15:49:07

    I’m don’t know much when it comes to investing, but gold is something I’d never considered investing in, and probably wouldn’t. All of your points are valid. What it really comes down to- gold is just a lump of metal, that only had value to the extent that someone gives it value. That is no different than any other type of currency.


  7. Martin Kelly
    Jan 14, 2011 @ 11:00:12

    I would not “invest” in gold, that is buy a piece of paper that states that I own gold, but I would consider buying a lump of metal. The only true stability of gold is that it is a physical commodity that does not deteriorate (like grain) and does not take up much room (like real estate). It’s protablitiy for exchange is really the only reason it has value at all.

    The problem with gold is that most of what you can by is coins that have extra value based on the type of coin. That value is artificial. The physical value of gold is of course much lower than the $1300 per oz mentioned in the article. That inflated price is much like the housing market in that it is not sustainable and will have to collapse. That self fulfilling proffecy about the value alwasy increasing will fail eventually. After the collapse, I might just buy some, but not now.


  8. kosmo
    Jan 14, 2011 @ 11:13:52

    If all you want is something that doesn’t deteriorate and doesn’t take up much room, aren’t there other materials that would fit the bill at a much lower cost? Fruitcake, for example.

    Crops may deteriorate, but they also have the ability to sustain life (before they deteriorate).


  9. Lazy Man and Money
    Jan 14, 2011 @ 13:03:20

    Doesn’t fruitcake deteriorate a little? Plus a few thousand dollars in fruitcake is not very portable.

    I don’t really buy the portability for exchange argument. It sounds good in theory… but you can only exchange it with dealers or people who are very skilled at knowing the difference between real gold and fake gold.


  10. kosmo
    Jan 14, 2011 @ 13:16:35

    Depends on who makes the fruitcake 🙂

    In addition to needing trading partners who are skilled at telling fake gold from real, you’d also need to find others that place a high value on portability and stability (lack of deterioration). I don’t see Portability + Stability = $1300/oz. There’s an X factor missing from the equation.

    I think I saw something that the cost of extracting gold is about $200/oz (when allocating fixed costs across the total number of ounces of extracted gold). Don’t quote me on that – maybe I can dig up the exact number.


  11. kosmo
    Jan 20, 2011 @ 08:42:49

    Here’s an interesting take, from the comics


  12. Jessica
    Feb 29, 2012 @ 03:03:38

    Gold for safekeeping is smart – especially with where the economy is going. Not where you are going to make money, mind you, but just one method to protect it.


  13. kosmo
    Mar 07, 2012 @ 09:57:46

    “Gold for safekeeping is smart – especially with where the economy is going. Not where you are going to make money, mind you, but just one method to protect it.”

    How does investing in gold protect your money more than any other investment?

    It seems like the general concept is along the lines of “people have always considered gold to be a good hedge against inflation, and thus it’s a good hedge against inflation”. However, that’s a foundation built of sand. It’s basically saying that past performance is a guarantee of future results.

    Let’s say the economy completely melts down and paper currency is worthless. You still can’t eat gold, or use it for shelter or clothing. You need to trade it to someone who can provide the good and services you need.

    In other words, you need to utilize it as currency.


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