Is Gold A Good Investment?Posted on August 31st, 2010 William No comments
If you listen to talk radio, you've no doubt heard that you should be investing in gold. If you're the cautious type, you might also have noticed that the people who tell you that, tend to have a lot of advertisements for places that sell gold. So are they just BSing you to sell ads, or is gold a good investment?
As of the time this article was written (end of August 2010), gold bullion is currently trading at $1,237 per ounce. Back in 2005, as you've no doubt heard, gold was selling for $400 an ounce, so if you'd invested in gold then, you could have tripled your money in only five years. Sounds great, doesn't it?
Of course, you can show that almost anything is a good investment if you choose the right time span. Beanie babies were a good investment a few years back (provided you sold at the right time). So was Tickle Me Elmo. While gold, unlike these examples, does have inherent value, there's no particular reason to expect that it will stay at the current high levels, let alone continue to appreciate. To illustrate, consider the price of gold in 1980: $400 an ounce! Ten years later, in 1990: $400 an ounce! Ten years further on, in 2000: $300 an ounce! There were a number of spikes over the years - to $700 between 1980 and 1990, to $800 in 2008 - but it's hardly the continually-appreciating investment that talk radio hosts would have you believe. Adjusted for inflation, in fact, today's gold prices are still well below what it was worth in 1981, when it sold for $599 per ounce.
Often people buy gold as a hedge against inflation; the thinking goes that as prices rise, making money worth less, the price of gold rises as well. However, there are more effective ways to achieve the same result; for example, you can buy Treasury Inflation Protected Securities (TIPS), which are a type of government bond that both rises with inflation and returns your money in case of deflation.
The advantage of gold as an investment is that it's highly liquid; while stocks may be difficult to divest yourself of without taking a loss if you need money in a down market, gold is always easy to sell. Unfortunately, it's a purely speculative investment, also known as gambling; rather than representing some underlying value, the price of gold depends purely on what people will pay.
If you do decide to invest in gold, stick with bullion and beware of fakes. Gold bars are forged by using a tungsten-filled cavity, and fake gold coins are commonly made of gold-plated lead. Coins do have the advantage over bars of being more difficult to fake (due to the lower volume) and having a standard weight. You can invest in gold either directly, by holding the actual bullion, or indirectly, through gold exchange-traded funds, which relieve you of the hassle of storing the gold yourself, but charge a commission and an annual storage fee.
Historical note: the first paper bank notes were gold certificates; they could be taken to the bank and exchanged for gold. The United States government first authorized these in 1863; eventually the US left the gold standard and the notes are no longer in use, although they are valuable to collectors.
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