Gold as an Investment

Tweet

Investments: Episode Eight

It seems everyone has gold fever these days. With prices soaring to record highs ($1,269/oz as of this recording) it is a great time to discuss gold as an investment.

Gold is different than many other investment options:

• Gold doesn't generater earnings like a stock.
• Gold doesn't earn interest like a bond.
• Gold doesn't earn rental income like real estate.

Gold is just gold. It's a rock we dig out of the ground, melt down and fashion into any shape our hearts desire. It has value because we believe it does.

People buy gold for one of four reasons:

1. Speculation - You buy gold at $1,269 per ounce because you think you can sell it some day for $1,270 or more.
2. Wealth Storage and Risk Hedging - In times of economic turmoil people buy gold to store their wealth and hedge against a decline in the purchasing power of their home currency. Gold's value is the same in every country.
3. Display of Wealth - Wearing gold jewerly, sporting a full grill of gold teeth or have gold faucets in ones bathroom are always a great way to let people know you are making bank.
4. Industrial Use - There are lots of gold plated HDMI cables for sale at Best Buy.

Watch out for the dumb money:

My good friend Jeff Cutler has suggested via Facebook a couple of weeks ago that I discuss "precious metals and why they are sometimes a scam." I assume he was talking about their speculative nature.

One warning sign I see is that gold's long bull run and blingtastic numbers are starting to make people on Main Street believe that they can't lose with gold. Just last night at a cocktail party a friend (not an investment pro) was telling me how he's swinging for the fences with gold. I hope he wins big time but my fear is that he, and other like him, will get caught holding the bag when things go bad.

What do you think? Is gold going higher? Is it a good investment? How much of your portfolio is exposed to gold?

Comments

[Derek W]

Mike

I couldn't disagree more with this post. Can you name a time when gold was at zero? I can name many stocks that have gone to zero. Those of us who bought gold at $350 are doing pretty well for ourselves on top of 1500% + profits we made from mining sector stocks and this was all done considering I am not an investment pro. The government can just keep printing the US Dollar until it is completely worthless.

When gold is at $1650 + and the value of the dollar is value is .75 or less we can talk about the importance of owning gold & silver (not jewelery). If your buying gold now your just hoping on the bandwagon. People should have 10% of their investments in gold & silver.

I believe the scam that Jeff might have been talking about was the "Cash for Gold" kiosk & infomercials.

This is just my opinion and I am not an investment pro. Results are not typical.

[Mike Langford]

Derek,

I am thrilled you have been successful but that really wasn't the point of the post. The point was that gold is either a speculative investment or a hedge. And that is something the investor needs to understand when making his decision about how much capital to allocate the the asset class.

The point I made about "dumb money", which is a very common term in the industry, was to illustrate a potential warning sign. See episode nine for a more in depth discussion about the topic. But I think you'd agree that it can't go up forever. And when speculative plays end they tend to end badly for a lot of people.

You are right that gold will likely never go to zero but it could easily return to $350. Or it could stay flat for years and investors would lose money holding the non-earning asset.

Gold's value is based on a belief that it is valuable and in part that it will be worth more in the future. Why would anyone invest in a non-earning asset that they didn't believe would improve in value? But what happens when people believe gold isn't worth $1,273/oz? Things start to unravel quickly. Think Florida condo market quick.

The fundamental lack of confidence in the US dollar you mentioned is definitely at play in run up in gold but does it account for all of your 364% paper gain? Has the dollar depreciated by that much? Gold's price has risen against all other currencies as well.

I agree that some exposure to precious metals is often a smart idea. Whether that's 10% or another number should be determined by the investors goals and objectives.

I don't know if gold is going to continue on its bull run. It could. It might also gap down quickly. Who knows?