Gold as an Investment?
As the uncertainty in the US economy continues, many people are looking to gold as an investment and hedge against inflation. Is gold a reasonable investment opportunity?
Right now gold is a special opportunity that is very similar to the tulip craze, real estate boom and dot-com bubble. Gold has went from a price of $400 an ounce in 2004 to over $1200 per ounce currently. Like the tulip craze, real estate boom and dot-com bubble, most of the price of gold now is based on speculation and not fundamentals.
The recent price increase in gold would indicate that jewelery sales are booming. There should be new jewelry stores opening on every corner, but this is not the case. The price of gold is currently based on based on the expectations of others buying gold as an investment and based on fear of a collapse of the dollar.
Buying something based on the buying expectations of others is not something that an intelligent investor does. It is possible that gold may go higher, but to be involved in a fools game may lead to poor returns and possibly future speculative behavior down the road.
It is interesting how there are so many books and so-called investment advisors are pushing gold as an investment without looking at any sort of fundamentals regarding the actual physical utility of gold as a productive asset. The message is generally the same: the US economy may or will get worse and therefore gold is a good investment.
The gold pusher may go on to then state that gold has went up in the past during the depression or some other historic behavior. My argument against this is that historic evidence of speculation does not make for a good investment decision. Following fools will not lead to good returns over the long-term.
I believe the only value of gold today is the fundamental productive value of gold which is used in electronics, jewelry and other things. In the past, gold was important as the US dollar was backed by gold. The use of gold was important not so much for its value but was important in keeping the treasury from inflating the money supply by printing too much money because every dollar was backed by one dollar worth of gold.
For those who believe that inflation will be worse in the future and faith in the dollar will falter, gold will never be a currency or means for payment for the mainstream.
Gold has a fluctuating value and people do not know what it is worth. During times of inflation, it will simply take more of the currency to purchase the same thing. The idea of a gold standard or gold backed payment method will not be one that has widespread usage.
When inflation takes off or if savings start going down again, people will actually most likely sell gold for dollars so they can pay for things. In a sort of doomsday scenario, the dollar will be used and gold will not.
Warren Buffett stated the following about gold at Harvard in 1998:
It 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.
References:
http://en.wikipedia.org/wiki/Warren_Buffett
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