Gold is a good investment if you invest for fun. That is it. If you are investing because you like to hold gold coins for the feel of it, it is an excellent investment. It feels great and secure to have a few in your closet to show your friends. However, do not expect to get a return on that investment. It is more for prestige and show. The aim of this post is to tell you, in general gold is a poor investment unless you:
- Know how to trade it like a market wizard and speculate.
- Find a good precious metals mining company or fund.
- Besides that, I recommend not investing in gold and certainly not for the long-term and in every economic situation.
The reason gold is a bad investment is it is a nonproductive asset. That is it plain and simple. That means it just sits in your draw and does nothing waiting for appreciation. On the other hand, if you invest in a company, for example, the company is actively trying to create a profit for you. Gold is just waiting for speculation to drive the price up. It is similar to holding raw land in the middle of nowhere, for appreciation in contrast to a rental unit in a city which has both income and appreciation. Any productive asset can only increase in value by supply and demand.
The demand for gold is driven by a hedge against inflation (Not statistically proven) or economic instability. The supply is always increasing (this creates downward pressure in the long-run if not matched by demand) and output is steady, therefore, without a corresponding increase in demand, prices do not go up, but down. China is very actively involved in gold mining and exploration. It is not the 1970s where most of the gold just came from South Africa. New supply sources are being opened up and explored.
Remember price is not just about demand but also supply. Look at the graph above and draw your own conclusions.
Ways to invest in gold
- When I worked as a broker people would actually want to buy the gold coins. Things like the Canadian Maple leaf or the Australian kangaroo nugget, the American Eagle or Krugerrand from South Africa. I use to chuckle at this guy, but you know it is a fun way to invest as you have something physical and give it to your grandchildren for fun. You can even buy gold online.
- Investing in jewelry – the design not the weight of Aurum or Au that matters as much.
- Sure gold has industrial uses but it is not the type of metal that will appreciate based on that as there are low-cost alternatives. Think about it people are not getting gold fillings anymore.
- Futures – this is just like trading any other futures options with a zero-sum game, for every winner, there is a loser.
- You can now buy gold in vending machines in Germany and Dubai. You just use your credit card or cash for payment. I think this is very flashy and fun for high-end hotels.
- The best way to invest in gold is by buying gold stocks. Why? You are buying a company that actively and professionally hedges and grows. Many people will disagree, but I do not trust buying a raw commodity.
In my mind, there is only one way to invest in Gold as a speculative commodity and that is based on moving averages as discussed in Stan Weinstein’s classic book. Most other books are a waste of time. Although it is considered a special precious metal it still obeys the rules of all precious metals when trading.
I remember one guy I worked with at an investment firm was a gold bug, that was in 1997. Every day he waited and check the price of gold seven times a day. He was just waiting for a movie. He had to wait eight years before gold began to move. That is a huge opportunity cost and time wasted. Just see it as any other investment, not for its glitter and allure.
Gold as a poor investment
- From 1980 to 2008 the price of gold was down. That is it took 28 years for gold to get back to its high. For me, that is a lifetime. Do you really want to be playing that type of game? Gold offers no dividends and just sits there.
- Gold investing is a speculators game. That is it is traded like any other commodity. When it is flat it is really flat and there is not a movement, but when it is hot, it has a lot of volatility and you really need to know what you are doing. You could get burned by trading professionals who short and long it for short-term gain.
- The risk/return ratio is not that great, for that level of volatility you can find better investments.
- Some people like a small amount of gold for diversification or fun. This is certainly OK. But if you are buying it as a hedge against a real crisis, remember, if there ever was a real doomsday people would be trading food, not gold. For goodness sake do not hold your breath for such a thing.
The price of gold has tripled
The price of Gold was 400 dollars an ounce in 2005. In 2010 it is now over 1200 dollars an ounce. In five years you would have tripled your money. does that not sound good? Yes if you could have bought at the low and sold today you would have done well. But it was all based on this crisis. Could you have ever imagined in 2005 that in 2010 the markets would be in the shape they are today? Maybe you could have predicted the stock market fall with moving averages and technicals but to this extent, I think it would have been more luck.
You would have had to have nerves of steel to hold gold during this time and not sell at 500 or 800 dollars etc. If you are a gold bug and want to buy bullion do not let me stop you. However, investing is for the sole purpose of making money. I would not play around with this asset class too much.
Remember that in 1980 the price of gold was 400 also. It is a high-risk speculative investment. If I am going to speculate there are more effective and fun ways to speculate. If you still really want to buy and sell bullion check out a Dummies book by Paul J. Mladjenovic on precious metals. Do not read books that are hype. Understand the market and trade on moving averages and hope for the best.
I would prefer a boring Canadian mining company any day, than simply buying gold outright.
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