It seems I see more and more commercials pedaling gold as an inflationary hedge. Some aging actor comes on the TV and tells us that gold is the only investment for him, and it’s safe.
Safe must be a relative term because gold is down almost 30% from its high in 2012!
While some people swear by their gold investments, we must understand how gold works as a part of our portfolio. First, gold is an investment and is speculative, but many people overlook this fact. Often people buy gold as a hedge against economic and political instability, but gold has risk. Since gold is also sold on the futures market and as a derivative, there will be fluctuations in price and market risk.
Also remember that gold is no longer tied to our currency. The United States ended the gold standard (backing our US dollar with gold) over 40 years ago. The US dollar is now considered a fiat currency (a currency backed only by the faith of a government). The folks who buy gold as a political hedge believe physical gold will serve them well if our political system collapses. In my personal opinion, I feel gold will only be of benefit in this situation if it has value, and value will be relative to supply and demand. If people want gold, there will be value……but you can’t eat or wear gold (at least not to stay warm).
Again, it’s is all relative to supply and demand. Gold’s value comes from the lack of supply, so more people are willing to pay a higher price. The world’s mined supply would fit (depending on where you get your info) into a cube 60 feet by 60 feet.
Now, back to gold as an investment. If you chose to invest in gold as a speculative investment and you understand the risk, your investment is no different than buying a stock. Someone is right and someone is wrong…either the buyer is right and is getting a good deal…..or the seller is right and is getting out at the right time. That’s the way the market works. Gold is an investment. It can go up and it can go down. It carries risk and is volatile.
Again, the allure of gold comes from the idea that gold is a great protector during difficult financial times. In February of 2008, gold was priced at $973 an ounce. In July of 2011, gold was priced at over $1800 an ounce…..that’s practically doubling in value in 3 years. That’s incredible! So, while our market and economy was moving into a decline, people came out of the woodwork to buy gold. This buying squeezed the supply and naturally forced prices up. Was this an artificial increase? No, the increase was truly tied to supply and demand, but the supply and demand was driven out of fear. The gold market has since corrected (down 30%) and who knows where it will go from here.
The purpose of this info is not to change the minds of those who believe in gold as an investment, it is simply to educate those who don’t understand gold as an investment. If you want to buy gold, you must first understand the risk of the investment….the same as any other investment in your portfolio. And, just like any other investment, investing without knowledge can be dangerous!
Great article on gold as an investment. I think that the recent plunge in gold prices should help investors to reconsider the widely popularized notion that gold is a safe haven asset. The truth is that the precious metals market is all about supply and demand as explained in this post.
Scott….you are correct…it’s all supply and demand. Thanks for reading and for the comments.