Hmmm…well, maybe not. Investing in gold is actually much less effective than it appears.
Gold has been a medium of exchange for millennia. In Elizabethan times about 400 years ago, it was said that an ounce of gold could buy one good suit of clothes for a man, with two pairs of pants. That’s still true, with lots left over. So gold has provided a reasonable haven for purchasing power over the centuries.
But what we’ve witnessed in the past decade has been anything but normal. As the Financial Panic of 2008 emerged, gold has become a proxy for a global currency. The dollar has fallen, the Euro has fallen, and dozens of third world fiat currencies have also fallen. With the loss of confidence in currencies all over the world, investment in gold has served as an alternative. And gold has surged, at least doubling, tripling, or even quadrupling in value, depending on when you bought in.
Historically, that’s not a normal behavior for gold. In fact, the price of gold is often driven by irrational perceptions that can’t be quantified or predicted. Thus a one-time investment in gold can seem perilously like simple gambling.
Gold is currently trading in a pattern which looks perilously like an overheated bubble. In what scenario would the current price work out? If the global economy fails, global investors won’t be seeking gold, investors will be seeking useable hard assets. After all, you can’t eat gold. You can’t put gold in your factory engines. And if the economy soars, then gold will get left behind. So the price of gold currently needs all the uncertainty to stay right where it is…and that’s not going to happen. Only mega-inflation could continue gold’s recent stratospheric rise, and that’s a self-defeating event.
In past decades gold has languished for years. After all, it’s a sterile asset: it doesn’t grow. It doesn’t create a dividend. One buried gold krugerrand does not make two buried gold krugerrands.
So here’s my take: invest in mutual funds which have a history of putting PART of their money in gold. Let the fund managers make the call about how much to buy. And stay diversified, as I describe in my book. History tells us that if you do this, the odds are reasonable that you’ll face a lot less volatility and make the kind of decent investment returns which create success.