As we work our way out of the Great Recession, it’s easy to see the results of what fear can do to investors. With so much uncertainty, some people have rushed to invest in gold and have seen some astounding returns in the last few years. While the long term track record of gold is actually sour in comparison to inflation, the last few years have resulted in dramatic increases in the price of this metal.
Before anyone invests in a precious metal like gold, it’s important to understand a few fundamental facts and figures that aren’t usually discussed during those late night infomercials and radio commercials about gold. (Which brings up a good point – you should definitely think twice about jumping into any investment that is running an infomercial on late night TV…)
The difficulty in understanding and investing in gold is that there’s no good way to measure its value. There’s no cash flow or earnings, and the rate is primarily determined via buyers and sellers. There’s also no intrinsic value to gold – no utility or usefulness (besides looking at it).
The value of gold is simply what someone will pay at a certain period of time. Sure, for centuries gold has been used as a measure of value and has assisted people in transferring value. Paper money, rocks, and other metals have also been tools used to transfer value. The item being used is simply storage of the work someone has done so that in the future, they can receive something of value from someone else.
While gold has never been worth nothing, it’s important to note that this statement is true because society will always use something (like gold, rocks, or paper) to transfer value between parties. Gold has been used because of its scarcity and difficulty to imitate/counterfeit.
Understanding The Risks of Gold
If you decide to invest in gold, you’ll need to understand the risks that may come. First, treating gold like a stock or mutual fund is dangerous. Trying to trade gold to capture upswings in the market can cause harm to your overall financial health.
Secondly, the temptation to overinvest your assets can really put your financial future at risk. With gold prices at such record highs, it may very well drop more rapidly than expected. Just like any investment, putting all your eggs into one basket is simply unwise.
Thirdly, gold can lose its purchasing power at any time depending on how the price of gold responds to the buyers and sellers in the market. There’s no guarantee that gold will increase or even maintain its current value.
Warren Buffett once said that “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.” I consider Mr. Buffett to be an excellent source of investment advice and his view of gold as an investment is summed up very well here.
Have you considered investing in gold? What are your reasons for it, or against it?
image credit: tao_zhyn