Today, gold is one of the most popular purchases linked to personal finance, third just behind real estate and the stock market. But many people debate whether gold is a good investment or not. In this post I will mention the pros and cons of gold in your portfolio.
Gold Is An Investment
Many say that gold is an investment. A hedge against bad times in the general market. Gold’s prices tend to rise when general markets do bad, but they also tend to fall when general markets do good. This alone would make gold an excellent investment to reallocate to during times times of duress. But I will explain why gold may not be the best hedge soon enough.
Another thing to keep in mind is that gold, much like any other worthy investment, has a rather good history of growth in value. This is because people find gold to be a good safe haven though. Even during global turmoil, people find value in the mighty shiny yellow metal, even more than they do the mighty dollar or almost any other commodity.
Gold Is Not An Investment
I have heard that while gold does increase in value, that does not mean it is an investment. One of the main reasons I have heard this is because gold has “no real intrinsic value.” That may be hard to understand since it is almost impossible to be human and not be drawn to the luster of gold. Even me and my wife could not resist the luster of gold when it came to an engagement ring despite the frugality we try to follow. But many claim that gold has very few practical uses.
Furthermore, while people have claimed gold protects people against inflation, there is not as must correlation in the change of the price of gold/ounce when plotted with the inflation rate. Use the chart below to see how changes in inflation and gold price may be similar, but not correlated. In fact, you can see that gold prices have not significantly changed until after 1970, when the gold standard was removed in 1971 by Nixon. This shows that people have held value in gold, simply because the government no longer does, and people hope others will still see gold as valuable no matter what happens in the world.
So which side do I support, that gold is an investment, or that it is purely speculative? I am expecting hate from both sides in the debate. I see investments in gold as a wild card, it can be an investment, but it can also be speculative. Timing is very important when it comes to investing in gold.
Many may claim that gold is purely speculative. Considering the large, and sometimes random changes in value, that does appear to be true. But I see it a different way. Like it or not, but almost every investment has some speculation behind it. Even if you create a company and have almost full control of it, you are still at the mercy of the supply and demands of general markets.
People may claim that gold only holds so much value, all the remaining value comes from people. Every investment follows that rule. Real estate in the end is just land with a structured set of beams on it. Technology is just a structured set of connections that created a controlled flow of particles which produce a certain outcome. Even life saving medicine is just a structured set of particles in which lead to a certain outcome. Nothing in life is the sum of its parts, we the people determine the value of the product based off the outcome we desire.
Gold Has Many Uses
That being said, gold has many practical uses. It is used in circuitry, advanced aircraft and spacecraft, and medicine (especially the revolutionary life-saving medicines). In fact, one of my colleagues is doing advanced research to develop a revolutionary analysis method using gold. For the protection of his work all I can tell you is that it has to do with the fact that gold is an excellent conductor. Do not let anyone tell you that gold has no use in today’s world. Anyone who says that has a lack of imagination and innovation to find use in the resources around them.
Also, the American Chemical Society says that many elements are at risk of going extinct. This includes silver, so we as a society may have no choice but to use gold in place of silver for many of silver’s uses because silver may be rarer than gold, assuming it is not already. The world is constantly changing, and so could the use of gold.
Right Idea, But Wrong Investment
Gold may have value, but by itself it is a risky investment. Its uses can change suddenly and it can easily be overvalued depending on investor demand. I would find it too risky of an investment for the potential reward.
While gold can be a good investment, other metals, minerals, and other raw materials can be good investments. So why just invest in one commodity? Why not invest in a company that mines and refines several commodities? Depending on the company, investing in the company would be much like investing in a mutual fund of commodities. Furthermore, commodities alone only change in value, a mining company can change its portfolio of raw materials and how it brings them into the market based off demand. If the company is good, it will change so it can keep growing in value even if the value of commodities do in value. These companies are only at risk of complete failure if people stop wanting shiny metals or useful metals used in many technologies.
Too much effort is being spent in the debate for whether gold is a good investment or not. Too many people want gold for too many reasons to truly say that gold is a bad investment, but by itself, it would be too speculative of an investment. In other words, it is unwise to invest all your money in a single investment. *Gasp* you mean when it comes to investing in gold, or any other metal, we should follow one of the most basic rules in investing, diversification? Exactly, gold may be a wild card, but many investments today can be wild cards, if you invest entirely in gold, you are at risk of high volatility and major drawbacks. If you skip out on gold, you are missing opportunities.
However, before you invest any significant amount of money into gold, I must address the elephant in the room. Many claim gold will hold value when the world is in turmoil. This is simply not true. Ask yourself this, would people trade nourishment, safety, or shelter for a shiny metal they may not be able to use? Consider this before investing in gold to determine if investing in gold is a good way to forge your wealth.