This is a question I get constantly on this Retirement Blog. Like most decisions in life the answer is: maybe and maybe not! It depends on what you’re trying to accomplish. Historically, gold has been used to hedge against government failure, inflation, economic uncertainty or as an investment. For example, when governments have been on the brink of toppling (wars, coup d`etat, monetary collapse and more) the demand for gold, along with diamonds, soars in that country. Generally as monetary excesses erode the purchasing power of currency (inflation), gold goes up in price. During depressions and recessions (economic uncertainty) gold generally moves up in price. As the probability of any of these occurrences rise, the demand for gold as an investment also rises. If you want to own gold, what is your motivation?
If as an investment, you need to know that gold has, historically, been very volatile in price. For example, in January 2000 the price of gold was about $300/ounce and is currently near $1200/ounce. The low price in 2008 was about $750/ounce and the high was $1000/ounce, and in 2009 the difference in high and low has been about $300/ounce. What’s more, if you buy your gold as bullion or coins, it should be stored in a safe place and that involves an expense. Also, neither interest nor dividends are paid on stored gold and this is an opportunity cost. Additionally, when buying physical gold you have to worry about the credibility of the dealer that is selling you the bullion or coins. Adding another layer of cost is the fact that you generally buy physical gold at a premium and sell it at a discount. You can skirt many of these problems by buying stocks of gold mining and producing companies, gold future contracts, gold focused exchange traded mutual funds and other financial instruments, but these add another layer of risk: can you liquidate your investment in economic Armageddon? Any way you slice it, gold is a speculative investment and not for the faint of heart or those that are risk adverse. But if you want to take risk and can afford the consequences, investing in gold offers the same challenges as other investments.
Many current-day investors in gold are concerned about “the country going to pot” or Washington just printing so much money it becomes worthless. Some of these investors are real whackos who sit on their pile of gold coins with a loaded shotgun while others have not clearly thought about the end-game of actually using the gold. If the expectation of economic Armageddon followed by bands of armed thugs roaming the country is your motivation for buying gold, there are several things you need to consider.
First, you can’t buy financial products because an economic collapse would shutter the markets and you’d have no way to “cash in”. Furthermore, you can’t leave your gold in a broker’s gold vault or your bank’s safety deposit box, because you might not be able to access it – you must take physical possession which means you’ll need a gun and a safe place to store your treasure. If you hide it, be sure and tell someone else where it is in case something happens to you… and that involves more risk. But, let’s say you have your gold in a safe place and have the firepower and ammunition to protect it from the roaming bandits. How are you going to spend it?
You’ll need your gold to buy food and the other necessities of life. Gold has no nutritional value, will not keep you warm, and will not quench your thirst. So you’re in a barter situation with someone who has what you need until a government can be established to create a currency. The last time the U.S. Government got involved in gold was in 1933 when the Gold Standard was abandoned, gold was demonetized and citizens were instructed to exchange their gold for paper money at a bank. My advice to those holding gold as a hedge against societal collapse would be to buy a walled fortress in a moderate climate and make sure it includes a truck garden and farm animals.
My conclusion is that holding gold makes sense only if your motivation is investment – whether to protect purchasing power or speculate on price volatility. Make sure you can shoulder the risk and afford the potential loss. Investing in gold is probably best done by purchasing your gold already in the ground, i.e., shares of gold mining or producing companies stocks. Stocks are easy to buy, have small spreads between the bid and ask, involve no storage costs and can be sold during business hours. Additionally, you can protect your investment’s downside with puts, calls, stop and limit orders and more.
Here’s a historical aside: man goes to great expense, even the loss of life, to dig gold from the depths of the earth, bring it to the surface, purify it and stamp into shiny gold bars. This preparation is a prelude to transporting it to Fort Knox, Kentucky and re-burying it in a high security vault. This “round trip” for gold is exceedingly expensive and serves little purpose beyond satisfying a strong emotional need. Beyond the use of gold in jewelry, electronics and dentistry, does our fascination with gold really make sense?
Shelby J. Smith, Ph.D.