Gold Investment – Solid Bet or Fool’s Errand?

Dating as far back as 560 B.C, gold has been used as currency.

Up until 1971, The entire financial system of the United States was built upon the gold standard. Every paper bill possessed a value directly linked to gold and could be exchanged for gold bullion.

What’s more, gold possesses a mystical cultural allure. A glance at a pristine gold bracelet or sparkling coin, triggers a feeling of material value. Its appeal is not limited to a particular nation or culture, but is practically universal.

However, in today’s world, is parting with your cash to invest in the metal a solid bet, or a fool’s errand?

There’s many ways to invest in gold, from shares in mines to exchange-traded funds. Nonetheless, this article will focus specifically on the purchase of gold as a tangible asset, in the form of bullion or coins.

So, let’s start with the positives. Gold is a great way to diversify your assets and expand your investment portfolio. While simplistic, not putting ‘all your eggs in one basket’, is essential if investors are to successfully manage volatility and minimise risk.

Secondly, we look set for a boom in the global jewellery market. India and China, as emerging economic powerhouses, continue to witness explosive growth in their middle classes. This will fuel demand for the oldest and most consistently fashionable status symbol in the world.

Thirdly and most importantly, investment in gold provides a powerful investment ‘hedge’. As we have seen as recently as 2008, the global financial system and the international banks at its heart are far from infallible. We live in a turbulent world, and in practical terms that $50-dollar bill in your wallet is no more than a piece of paper. Gold is a physical asset of value, not reliant on societal safeguards nor the promises or goodwill of others.

As Greenspan, former chairman of the Federal Reserve put it: ‘Gold has always been accepted without reference to any other guarantee’. Often known as the ‘crisis commodity’, gold can protect investors from rapid inflation caused by geopolitical uncertainty. Further, gold is a useful safeguard against unlikely but plausible government overreach in the form of frozen bank accounts or confiscated assets.

The metal has a proven track record of increasing its value in times of low economic confidence and economic recession. In August 2007, prior to the ‘global crash’, one ounce of gold was worth $981. Five years later, following worldwide economic turmoil, the same ounce of gold could have been cashed in for $2471.

However, before you rush to sink every spare cent into the shiny commodity, there’s a couple of things you ought to consider.

Gold is a ‘lazy investment’. Gold will never pay you interest or dividends. It is a static asset. While gold holds wealth, it does not produce more of it. Investment in a growing business has the potential to provide you with a productive income that can then be reinvested. Contrastingly, investment in gold is not measured by its ability to generate income for its owner, but by a speculative gamble that someone will pay more for it in the future.

Multibillionaire Warren Buffet, the World’s most famous investor, has some harsh words for gold. He uses his own illustration to support his view that gold is ‘unproductive.’ If you were to purchase 50 ounces of gold, a decade from now you would still have 50 ounces of gold, but it will not have worked for you. However, if you invested the same amount of money in farmland, not only will you still have it a decade later, it will have produced valuable crops that you can sell and reinvest in other things.

In addition, while it may seem prudent to plan for the collapse of the economic system as we know it – in such a severe and unprecedented scenario, how useful would gold be? Yes, it could perhaps be traded, but it’s worth remembering that it possesses no intrinsic value. You cannot eat or drink a gold coin.

Those who invest in gold are often guilty of investing emotionally without considering logistical hurdles. If you are thinking of purchasing gold, have you considered taxes, storage and insurance? Most importantly, selling physical gold when you decide it’s time to cash in might be far harder than you imagine. A final consideration is how much gold you could realistically purchase. Even if you were to spend $10,000, this would only buy you 7.7 ounces of gold – that’s 7 and a half tiny coins.

Overall, a large investment in gold does not appear to be sensible. However, a small personal purchase to diversify assets and hedge against economic turmoil seems reasonable.

Instead of gold, investors might be wise to go for silver. $2,000 will purchase you less than 2 ounces of gold. Meanwhile, at today’s price, the same amount of money will get you 117 ounces of silver. While historic notions of currency and value still hold, silver is also used far more extensively in the production of vital technological equipment and machinery.

Either way, for this strategy to be effective, investors should make a very small investment, when times are good and prices are low, and then hold on to it until times of economic uncertainty and high levels of inflation.