Gold is probably one of the most misunderstood areas of investing and economics. Investors typically are split down into one of two irrational groups — those who always think gold is worthless and in a bubble, and those who always think gold is on a permanent one-way trip to the moon. The truth lies somewhere in the middle.
Let’s look at the facts about gold, without ignoring a basic understanding of economics principles and economic history. Hint: both pop-investors and gold bugs are often wrong.
In this article, we’ll look specifically at how gold behaves in the long-term, and what kind of portfolio adequately has gold without going too far to an extreme.
A Few Basic Pro-Gold Facts
Anyone familiar with gold probably knows that plenty of “experts” look down their noses at gold. Many often see it as a barbaric investment. Even Warren Buffett — famous for using high-leveraged equity plays to build a fortune — mocks buying gold, saying that it’s nuts.
Unfortunately, being really good at making money via stocks often makes people blind to the alternatives — like land, gold, and silver. Here are a few undeniable facts that the pro-gold crowd should be familiar with.
1. Gold is safer than TIPS, bonds, and stocks. There is absolutely no way around this — gold doesn’t go bankrupt, doesn’t ever become completely worthless, and over time will beat inflation. TIPS, bonds, stocks — they can’t say this. While a diversified portfolio will out-earn gold over time, gold mixed with a portfolio makes it more secure, and acts as a type of financial insurance. Any of the investment “experts” who might disagree just needs to brush up on economic history.
Of course, by “safer” I don’t mean “more likely to earn money”, I mean “more likely to not become worthless.”
2. Gold is a fantastic diversification tool. When people lose faith in the system, gold goes up. People claim this is because of “fear”. I think it should be more appropriately seen as a measure of the general uncertainty about the system which is often extremely understandable. Stock crash of the 80s? Made gold go through the room. Stock crash of 2008-2009? Well, that’s also put gold through the roof.
As a diversification tool, gold mixed with stocks can make a portfolio much stronger over time, much less volatile, and even much more lucrative if rebalanced correctly.
3. Gold beats inflation over time, period. This is essentially unavoidable. Even though the price of gold is often manipulated by central banks and large financial institutions, it’s always been worth something — enough to sit up and take notice if you see a gold coin on the ground.
If you had 1000 ounces of gold back when Jesus walked the Earth, then you would have been a rich person. The same is true now — you’d have a million and a half dollars. No publicly traded company, no bond, no Treasury Bill, no [fill in the blank] comes close to such a record. Land is sometimes worthless, companies go under over time, governments collapse, currencies dissolve, silver prices have been essentially worthless before… but gold has always been worth a subtantial amount.
Of course, that gold is such a great inflation hedge is also a strike against it in a sense — if your investment just keeps up with inflation over time, then you can’t exactly claim that it’s a way to generate wealth in and of itself over time — the entire appeal is that it’s charts should look relatively flat over the course of a thousand or so years. The only way to actually get “wealthy” with gold is through speculating through the different gold market cycles.
Because of this, gold is best invested by the average person not as a way to make money, but as a way to hold on to one’s money. A “doomsday” insurance policy, in a sense. Because it often counteracts stock-market drops, it can also be used as a good way to make money via rebalancing over time — as a type of stabalizer of your portfolio in case of bear markets for stocks.
What do you think about gold? Do you own any Gold? Do you think it’s old fashioned? Is our current gold market about to collapse or go higher?
This was an article written by Shaun Connell