Gold Investment

Is Gold A Good Investment?

by Tim on April 27, 2011

As we work our way out of the Great Recession, it’s easy to see the results of what fear can do to investors.  With so much uncertainty, some people have rushed to invest in gold and have seen some astounding returns in the last few years.  While the long term track record of gold is actually sour in comparison to inflation, the last few years have resulted in dramatic increases in the price of this metal.

Before anyone invests in a precious metal like gold, it’s important to understand a few fundamental facts and figures that aren’t usually discussed during those late night infomercials and radio commercials about gold.  (Which brings up a good point – you should definitely think twice about jumping into any investment that is running an infomercial on late night TV…)

Valuating Gold

The difficulty in understanding and investing in gold is that there’s no good way to measure its value.  There’s no cash flow or earnings, and the rate is primarily determined via buyers and sellers.  There’s also no intrinsic value to gold – no utility or usefulness (besides looking at it).

The value of gold is simply what someone will pay at a certain period of time.  Sure, for centuries gold has been used as a measure of value and has assisted people in transferring value.  Paper money, rocks, and other metals have also been tools used to transfer value.  The item being used is simply storage of the work someone has done so that in the future, they can receive something of value from someone else.

While gold has never been worth nothing, it’s important to note that this statement is true because society will always use something (like gold, rocks, or paper) to transfer value between parties.  Gold has been used because of its scarcity and difficulty to imitate/counterfeit.


Before you invest in gold, I’d suggest you ask yourself this simple question: why?  Are you wanting something to store value in, OR are you looking at it as an investment?  If you’re viewing it as a store of value, be careful to realize that it’s only as valuable as someone will pay at a given time.  If you’re fear for society is truly great, you might consider storing items that truly provide value – ie: nonperishable foods, water, clothing, etc.  If you think of it as a good investment, I’d caution you to think back to the internet boom, tech bubble, and housing bubble that we watched over the last two decades.  If something seems too good to be true, it probably is.  Besides, Proverbs 13:11 says “Wealth from get-rich-quick schemes quickly disappears; wealth from hard work grows.”

Understanding The Risks of Gold

If you decide to invest in gold, you’ll need to understand the risks that may come.  First, treating gold like a stock or mutual fund is dangerous.  Trying to trade gold to capture upswings in the market can cause harm to your overall financial health.

Secondly, the temptation to overinvest your assets can really put your financial future at risk.  With gold prices at such record highs, it may very well drop more rapidly than expected.  Just like any investment, putting all your eggs into one basket is simply unwise.

Thirdly, gold can lose its purchasing power at any time depending on how the price of gold responds to the buyers and sellers in the market.  There’s no guarantee that gold will increase or even maintain its current value.

Warren Buffett once said that “Gold gets dug out of the ground in Africa, or someplace.  Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it.  It has no utility.  Anyone watching from Mars would be scratching their head.”  I consider Mr. Buffett to be an excellent source of investment advice and his view of gold as an investment is summed up very well here.

Have you considered investing in gold?  What are your reasons for it, or against it?

image credit: tao_zhyn

{ 36 comments… read them below or add one }

Derrik Hubbard, CFP April 27, 2011

Tim, thanks for your thoughtful comments.

Gold and other precious metals should not be in high concentration in any portfolio, but I think that in light of the current economic circumstances and the falling dollar, that they may have a place.

Gold and silver can provide an inflation hedge during times when the dollar is losing value. I don’t see the Federal Reserve decreasing the money supply any time soon.

I think that you have a definite point about “where” you purchase and in what form you purchase precious metals. Late night TV infomercials and telemarketing firms are notorious for selling numismatic gold coins instead of gold bullion, which is what you want to have if you want a commodity that reflects gold prices.

Derrik Hubbard, CFP
http://www.yourfinancialpurpose.com/blog

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Tim April 28, 2011

As always, you bring great points with your comments Derrik. If someone wants to have precious metals in their portfolio, they definitely need to make sure they’re buying it properly, and not at a premium.

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George June 30, 2011

Derrik, your comment reveals you don’t understand the difference between numismatic and bullion gold. The late night commercials ARE selling bullion gold. In fact they sell ONLY bullion gold, not numismatic gold. If you follow this thread and respond, I’ll take the time to respond, but at this point, I’ll leave it at that, since I don’t want to waste my time commenting on something that’s not being followed.

Have a great day!

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Howie April 27, 2011

Through being bombarded by commercial after commercial of G. Gordon Liddy attempting to convince me that gold is a great investment (FOX news has had ALOT of gold commercials on lately), I admit, I’ve considered it quite a bit lately. You make some very good points about Gold, Tim, and I especially like the biblical application. Thanks again for another great post.

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Tim April 28, 2011

Thanks Howie. Every time I flip to Fox, I end up seeing a handful of gold commercials. It’s pretty annoying because it’s really fear based. I’m not against gold – I just don’t like the idea of flocking to an investment and putting a large sum of my assets in something that is difficult to put value on (in my mind).

Thanks for your comment!

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George June 30, 2011

Tim, nice blog! However, your comments on gold clearly show you’re understanding of money has been deeply affected by the “system”. Which system btw is in a meltdown mode.

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Tim July 2, 2011

Hi George,

Thanks for the compliment and thoughtful comments!

The system of money is fascinating, and really pretty simple when you think about it. I think we both agree that what’s been happening with our financial system can be considered a mess.
I stand by my comments that caution people to ask ‘why’ they want gold in their portfolio. It’s foolish to flock to something without understanding why it’s a ‘good’ investment. If someone has been looking at the spike in gold as a reason to get into it (which is part of the message for almost every gold advertisement I’ve seen) then I would caution them to think twice! Gold as an actual ‘investment’ (something that will increase in value over time) doesn’t have a steady track record. People should have bought gold 10 years ago…now they’re wanting to buy it at its high – sounds opposite to the rule buy low, sell high..

The ‘store of value’ argument is the only one that can hold water in my view. I can’t argue with history, and it’s a fact that gold has been used for centuries as a store of value. If someone is truly wanting gold as a store of value, I don’t have a problem with it. I would just caution them to have other forms of resources available that have utility – that is, food, water, shelter, clothing. After all, someone with this mentality is hinting at the idea that a collapse is coming; so if it does happen, why would you just want yellow metal in your closet and not immediate food and other resources?

I welcome your reply George,

Tim

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CreditDonkey April 28, 2011

Putting eggs in one basket is always risky but sometimes it offers huge returns. However, it truly unwise to invest purely in gold or silver. The market is very volatile. You can just invest in derivatives according to the price of gold or silver. You are pushing your luck but at least the returns are tangible and on hand.

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Tim April 28, 2011

Thanks for the comment CreditDonkey. I’ll have to admid, I’m not up to speed on investing in derivatives according to the price of gold or silver, so it’s something I won’t be doing, but it’s an interesting idea to look into and read about.

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AAAMPblog May 1, 2011

Every investor should have precious metals exposure in their asset allocation because these investments are not correlated with most other investments and provide true diversification. However, valuation is the key to sucessful investing. Because of the high valuation, the percentage of precious metals should be a smaller part of any portfolio than anytime in recent history. Thank you for being a voice of reason at a time of genuine hype and misleading of the public.
Ken Faulkenberry

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Brian February 12, 2012

I find it interesting that you said “percentage of PM’s should be the smaller part of any portfolio than at any other time in recent history”. I see it exactly the opposite. I see the government debasing the dollar more than ever by printing and borrowing out of control. The purchasing power of the dollar is declining daily. The stock market has gone sideways for a decade (it’s actually dropped if you adjust for inflation). The economy is not near a recovery as our GDP is shrinking and our debt is growing. The Euro is in a debt crisis and is connected to the dollar. The global fiat currency experiment is on the verge of collapse. No other asset class has outperformed gold over the past 12 years. The stock market is at the top right now and can only come down. Right now is the time to maximize PM percentage in your portfolio and decrease stocks. One day that will change but there is currently nothing that can decrease the price of PM’s.

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Angelle August 15, 2011

Everything is good untill the government takes your gold

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Caerleon September 28, 2011

I’m going to agree with CreditDonkey’s overall viewpoint here.

The way I see gold is thus:

* It has a high intrinsic value.
* It is a time tested currency (many civilizations throughout human history have made use of it as a currency)
* It is more of a CURRENCY than a COMMODITY.
* It represents a good store of wealth/value.
* It is a useful hedge against inflation.

However, if you expect to get rich off investing in gold then you have another thing coming (unless, of course, you are extremely lucky)

And re Buffet’s comment- I’m pretty sure Martians would also be scratching their heads at how we use worthless paper backed with the promises of politicians as a suitable substitute for a real currency.

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Steppen October 3, 2011

Hi Tim,

I work at a major university and I have a choice in retirement plans – VALIC, Fidelity, and TIAA-CREF. It’s mandatory that I contribute and my employer will match my contribution. I’d like to pick one of the above and tell them I want to invest in gold stocks. I am not a skilled investor, but would you invest in gold now? Also, would you put all your money into gold? If not, what percent?

Thanks,
Steve

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Tim October 21, 2011

Many employer sponsored retirement plans won’t give you the option to invest solely in a single precious metal like gold. I’d check with each plan to see if they have the precious metal investment option that you want. As for an opinion, I think I tried to give mine as best as possible in the article. I’m not swayed by the ups and downs of gold prices or stock prices for that matter – to me that’s where emotions can really hurt an investment. I will say, however, that it’s not wise to put 100% of your money into gold. Many experts will tell you that precious metals can be good to have as a part of a balanced portfolio, but not in excess of 10-15% of your total assets.

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Karl October 12, 2011

I have some silver. In contrast to gold it is used in applications, including some electronics. It is the most conductive metal I believe. After reading books on money, I think that there will be a transfer into precious metals. THe reason is that the baby boomers, many who have money in the stock markets after the 401k plans started, will be forced to start withdrawing. Since they are a statistically significant bunch, around the year 2016 or so, when they start turning the required age to have to begin withdrawing, moeny will begin flowing out of the stock market. I am putting some faith in silver as a potential benefit of this transfer of money. If you are interested, I suggest reading Rich Dad books and the blog, as well as the wealthcycles blog.

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Karl October 21, 2011

The reason that Gold and silver are referred to by people like Republican ROn Paul is that, historically, they have outperformed fiat money. Our dollar is backed by nothing, therefore it is fiat currency. From what I have read, fiat currencies have been used throughout history and have always resulted in failure.

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Karl October 21, 2011

From what I have read the government is not likely to confiscate gold. THis is despite the fact that FDR confiscated it from citizens. Situation is not the same.

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BBF @ Blue BIrd Finance October 24, 2011

I really appreciate many of your points, Tim. And I have loved reading through the various comments and opinions shared here.

Allow me to put in my two cents worth…

Historically, when gold rises to the kind of levels it’s trading for today, there is almost always a fairly dramatic drop. In other words, prices have always normalized. When has gold sustained such high prices over a long period of time? I admit, we are in very confusing and difficult economic times, but have we not felt similar fears in the past? Have we not seen our economic future as scary and questionable?

Again, this world-wide economic problem has unique traits–they all do! Gold, however, has a very real track record of normalizing. So–should you buy now? Maybe for short term gains. Should you buy and hold? In my opinion, that would be the WORST thing you could do.

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Karl October 24, 2011

Let me state that there are probably better uses, if you assume that there won’t be a transfer of wealth and also if you are more interested in another way to earn money. It is ultimately what you find compelling, such as real estate, business, stocks or horse trading that you should focus on. I find the prospect of gold and it’s history to be very compel. I am also interested in real estate and business.

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Karl October 24, 2011

I am very interested in Warren Buffett’s methods, as well as the real estate and it’s tax advatages and cash flow, as described in Rich Dad Poor Dad and Robert Kiyosaki’s books.

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Pay day uk January 9, 2012

In my opinion, gold investment is really a good investment as it’s values always go high . It is not just a commodity but a cash of all the times.

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Nicholas February 10, 2012

Hey, who ever wrote this obviously has no clue what they are talking about. gold has much intrinsic value it is one of the most common conductors used in electronics, idiot.

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Brian February 12, 2012

I agree with you. Gold and silver are in their cycle right now. Just look at the gains you would have accumulated if you invested in gold and silver 10 or even 2 years ago. We are going into a currency crisis and only those with gold and silver will survive.

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payday loan comparison February 13, 2012

In my opinion,gold investments is a wise option which can give good return in all the times. Your post is very rightly focusing on gold investment.Keep sharing

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Usiere February 27, 2012

Investing in gold, like any other investment needs financial education and due diligence. You need to basically know what you are doing, not simply following the herd

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Elmer Thomas March 12, 2012

The price of gold has literally skyrocketed in the past year, leading many investors to ask themselves “is gold a good investment?” Ask anyone on the street and you’re going to get a different answer, but the fact remains that precious metals like gold and silver are the backbone of an economy that depends on paper and credit as currency. Because of this, investing in gold stocks is absolutely a good idea for any investor.

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MichaelPrinz March 16, 2012

There are many definitions for investment but I like to use the economic definition because I believe it gives clarity to my point. An investment is an amount set aside for future production; consumption is delayed in order to use the resources for future production or benefits.

Some may choose to use a broader definition of investment that includes speculation on asset prices. As an investor you will be better off to distinguish between the two kinds of expenditures.

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Aftab Singh April 8, 2012

Interesting article, but I think I have to disagree with your statement that:

The difficulty in understanding and investing in gold is that there’s no good way to measure its value.

The fact is that the gold price is merely the ‘going rate’ at which people around the globe swap currency units for weights of gold. So, in addition to (rightly) considering the question; ‘what is gold anyway?’ one should equally be asking; ‘what is a currency unit anyway?’. When one delves into this subject one finds that it a currency unit is a liability upon the issuing central bank’s assets – which includes gold. So there is – in fact – a clear mechanism for valuing gold (in dollars, pounds, euros, ….) by comparing the issuing central bank’s assets with it’s liabilities. In short, discovering the degree to which each central bank note (around the globe) is ‘backed by gold’ and then (admittedly) guesstimating where it should be given the currency global macro picture. I would suggest checking out the charts at this guide on whether or not gold is a good investment.

Thanks,

Keep up the good work.

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Chris April 16, 2012

I’ve been investing in gold for over 3 years now. The returns have been fantastic.

I’m comfortable putting 100% of my portfolio into precious metals in this macro environment (2000-2014?). But when the macroeconomic environment changes, I don’t think I will have any money in gold as there will be better opportunities.

That kind of flies in the face of the “keep 10% in gold at all times” standard advice.

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Anonymous April 30, 2012

I’m not an economist but a doctor. It doesn’t take a genius to work out that if the largest banks in the world are trying to seize all the gold available in the world then surely it is for good reason. The Rothchilds, being used as just one example, probably have the largest store of gold ever held. And the reason is because as people have previously pointed out, money is of no value when **** hits the fan. In fact neither is gold. But if you need to get out of a tough situation then gold is a versatile CURRENCY to trade with. It is not however necessarily something to make you wealthy, rather it is to secure the wealth you currently own- like a house or other physical assets.

Famine, drought, public disorder… these are the things that will affect you most. In England in 2011 there were mass public uprisings by youths who had no cause, they fought and rioted for nothing other than personal gain…ENGLAND one of the most ‘sophistocated’ nations on the planet. The truth is the police were powerless to do anything. In south England there are water droughts and water companies in wales now realise this and will use water as one of the main forms of economy in their country

I feel an entire article could be written but have not the time. In summary I would say invest in all these things, food, shelter, land, a water supply. If you were truly serious about wanting to prepare for the worst (which is partly why we invest) then these are the things we should be buying. Gold is simply one of these ways

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Suraj Kumar June 22, 2012

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Rick June 26, 2012

The day is coming when, “They shall cast their silver in the streets, and their gold shall be removed: their silver and their gold shall not be able to deliver them in the day of the wrath of the LORD: they shall not satisfy their souls, neither fill their bowels: because it is the stumblingblock of their iniquity.” Ezekiel 7:19

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Shawn @ Gold trading September 29, 2012

I am a forex and stock trader but few months ago I invested in gold. Some trading experts suggest me to invest in gold due to continue demand of it. I am agree with Warren Buffett’s advice as well. Investing in gold is new experience for me. I hope, it will offer me desirable profit.

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Gold Analysis November 15, 2012

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.
If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard”.

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