We have written many times about gold and we have done so always using a positive outlook (see for example Gold Is A Shiny Beacon Of Hope or Real Money For A Real Economy ). Does this mean that gold is a good investment? Does this mean that you should rush to your favorite gold dealer or trusty trading entity and fill in your account with gold? Not at all.
GOLD AS AN INVESTMENT
Shares and mutual funds
Typically if you speak to your friendly trade adviser or bank employee they will always recommend to hold a small amount of gold in your account. The recommend format in which that gold should be held it is almost invariably as a mutual fund which coincidentally they happen to sell be selling.
The strange element of this advice is that they are never very clear as to why you should hold gold other than a generic explanation about asset diversification. Most people are not satisfied with this reply but considering that life is too short they go along with it. But does it make any sense? Take a look at the graph below, it represents the unit price of the well-known mutual fund. As you can see the fluctuations over time are very large. Furthermore said fluctuations do not seem to be related to major economic or political events. If this is indeed the case is there any way to understand gold prices? The short answer is no.
Solid gold
What about gold bullion or gold coins? Are they any better in regards to providing safety? Again take a look at the picture below. You will notice that again price fluctuations are not related to major economic or political events. How is this possible? Isn't solid gold the ultimate store of value? Isn't gold money?
Solid gold as a store of value
It is true that gold has kept its value over very long periods of time. For example in Roman times one gold coin would have bought you a good toga. Today that very same gold coin can get you a good suit. This is indeed an example of store of value. However if you again take a look at the previous picture you will notice that in recent times the price of gold fluctuated wildly. As a consequence if you would have invested at the wrong time you would have lost a lot of value. Consequently, gold is indeed a very good store of value but over very long time frames. As such it is not suitable for regular investments.
Gold as money
The next question we need to ask about gold is it money? The answer is no. Gold is not money. This is so because it fails one of the most basic properties of money. Gold is not widely accepted for goods and services. You cannot walk into a supermarket and buy whatever you need and then pay with gold coins. Therefore gold is not money. It certainly used to be, but not any longer.
GOLD AS INVESTMENT, AGAIN
We just exposed the reasons why gold cannot be considered an investment. Yet we are now saying that it may be so. How is this possible? Simple. Gold prices fluctuate wildly. As such and as with any other asset is it possible to speculate with it. It so happens that the wider the fluctuations the wider the potential profit. And so if you have the stomach and the skills to do market timing, gold is certainly a good potential target for trading. However for most people this is not a realistic choice. Market timing is certainly not for the weak of stomach not nor for the unskilled person.
GOLD AS INSURANCE
Then what is Gold good for? Gold as good as insurance over very long periods of time. This is a blessing and a problem at the same time. Most people are told by investment advisors that they need to hold assets for the long time in order for their assets to appreciate. However, many studies have shown that people have the tendency to be impatient hence buying and selling at the worst possible time. These very same studies have shown that people lose a lot of money doing so. Furthermore, the original studies that showed that an investment must be held for a very long time are routinely misinterpreted. The truth is that those studies account for large dividend payments which are no longer routine since the 60s. Most gains since then have been driven by capital gains which are much more unstable and very often do not even match inflation.
Gold is an asset that will protect you from the worst of political and economic stupidity. In general terms and as we have shown before politicians print; eventually, over long periods of time this leads to very high inflation and economic collapse. This is what gold will insulate you from.
However, in order for gold to fulfill its role, it must be hold to almost perpetuity. Forget everything that's called paper gold. If it's not solid gold it's just a pipe dream. The only way to hold gold is as bullion or coins. Bullion can be purchased from a few mutual funds that specialize in that, from two of three companies that hold gold in warehouses or from reputable gold dealers. Solid gold can also be purchased as gold coins. If you are going to use this route then buy the most commonly traded gold coins in your country (so that the price will be cheaper) and store those coins preferably in a place where the government can't get their hands on. Bank deposit box are certainly an option but not a terribly good one. Remember, if the government knows or suspects something eventually it will act on it.
Once you have done this, once you have purchased solid gold, you must keep this gold regardless of what's going on in the market. You will be very tempted to buy more or sell it as the price fluctuates. Don't! This gold is for insurance only! It is not for trading; it is to ensure that you will be able to rebuild after an economic catastrophe.
If you wish to trade and do market timing with gold, use a completely different account or gold pot.
CONCLUSION
Very unfortunately gold is not money and it is not a good store of value over short periods of time. It is however an excellent issuance in the long term against political and economic stupidity. Gold will keep you afloat when everybody else is sinking. This is what gold is for in these modern times. Anything else it's a pipe dream.
We wish you a golden future but this is not possible, at least consider making your future a little bit more golden. Or not. Your choice.
Note: please see the Glossary if you are unfamiliar with certain words.
