Since gold has been on a fairly steady march upward recently I thought we’d talk a little about that today. Here are a couple popular reasons people buy gold:
#1 Gold is used as a hedge against inflation
#2 Gold is seen as a solid store of value in the event of economic collapse
Let’s start with #1 above. It’s debatable as to whether or not gold is a decent hedge against inflation. Let’s go back about 30 years to 1980 (a good time period for comparison, as there was a pretty good gold rally going on right about then and it’s been on a little run as of late). In 1980 we were in the Second Cold War and inflation and oil prices were sky high. Gold hit a record high of $850/ounce in 1980. An investment made during that gold rally would still be losing to inflation. In fact, gold would need to close north of
$2000/ounce to beat inflation on that 1980 investment. Even given its current rally, it’s at about $1240/ounce today. To be fair, gold does have a slightly positive real return if you go back about 75 years or so, but is your investment time horizon that long? Maybe not.
Now on to #2. I’m not sure I’d trust gold to insure against economic collapse. Let’s assume the value of the dollar evaporates. Assume inflation runs out of control. Assume there are riots in the streets. Assume a guy owns some fancy gold bars and a bunch of gold coins. What the heck is he going to do with those things? Run down to Dillons to restock his supply of canned goods by paying with a Krugerrand?
Bottom line: #1 I think there’s a better way to hedge against inflation (more on that in my next musing) and #2 if we really do experience financial Armageddon, I don’t think a stockpile of gold will save the farm.
I’m not saying you should never ever invest in gold, I’m just saying it’s a very volatile, very risky investment and you should know what you’re getting into. More fun gold facts for you coming up in my next musing.
And if you really want to hear Dan Seals, here's a little bonus for you: Dan Seals | Everything that Glitters (is not Gold)