Why Gold Isn’t Such a Great Investment

Investors who’ve had their confidence in the stock market rocked over the past few years have been flying to gold. With skyrocketing gold prices reaching new heights seemingly each day, it’s hard to tell whether investors are simply along for the ride or if they’re the ones pushing it up.

Regardless, if you got into gold early, then good for you. There’s no such thing as cheap gold anymore. With an ounce of gold priced at well over $1,300, latecomers to the new gold rush need to seriously consider whether or not the precious metal is a sound investment. When it comes to money, those who are late to the party are usually the ones left holding the bag.

How to Buy Gold

There are several different options when buying gold. If you’re rich enough and have the space, you can buy actual physical gold bars and coins that you can store in a vault. Most people, however, can buy gold ETFs, certificates or stocks in mining companies to play the market trend, too.

Many affluent investors may feel safer owning ridiculous amounts of physical gold just in case the world ends tomorrow and the world’s financial system collapses. What they fail to consider is, if in fact that were to happen and society fell into utter chaos and anarchy, what good would their gold do them? What they should be investing in–for that scenario, anyway–is guns and food.

Gold as an Inflation Hedge

The biggest reason investors are flocking to gold is because of the supposedly inevitable hyperinflation sure to destroy the value of the dollar. While the government’s deficit spending is a cause for concern, most economists argue that the near-term risks of inflation are way overblown.

The deflationary forces are pulling just as hard as the inflationary pressures on the economy, creating a very delicate balance at the moment. The job of the U.S. Federal Reserve is to maintain that balance through using the tools available to them.

Regardless, even if you were to invest in an inflation hedge, gold may not even be the best way to do it. There’s a common misconception that gold is the perfect investment to counter inflation. That isn’t necessarily true. Gold, like any commodity–be it precious metals, oil, corn, etc.–increases in value if the value of the dollar goes down. However, with prices so high, gold as an investment may have crossed the threshold as more speculation than actual hedging strategy.

Other Investments that Hedge Inflation

In fact, if inflation is what you’re worried about, here are several ways you could better invest your money:

• Stocks: They’re often overlooked as a way to combat inflation, but if the value of the dollar is falling, then prices for goods increase. This, in turn, drives up profits for public companies.
• TIPS: Treasury Inflation-Protected Securities are government-backed bonds that protect investors from a drop in the dollar. As inflation rises, so does the rate of the semi-annual interest payments made by the security. There are disadvantages, however, because inflation adjustments are considered taxable income. However, gold investors run into the same problem.
• Other Commodities: Precious metals like silver and copper and other commodities like oil and corn actually serve a purpose. Gold, on the other hand, is only valuable because of its scarcity. When you have an asset that is only worth as much as someone else is willing to pay for it, and it has no real practical use, you open yourself to being very vulnerable to price volatility.

Real estate is another asset that investors move toward during times of inflationary risks, but the effectiveness of land as a hedge is debatable.

Gold: Good or Bad Investment?

Gold isn’t necessarily a bad investment–it hedges against inflation and there’s demand for it. The problem with gold right now is that it’s a borderline bubble and if you’re getting in late, you could end up just like those homeowners who thought house prices would always go up. On the other hand, could gold go up even more? Absolutely.

The important takeaway here is to understand that gold is one of many types of investments. It has it’s advantages and disadvantages and unless you want to open yourself to suffering dramatic swings–which gold is wont to do–it’s better to just keep a diversified portfolio.

For example, even if you diversify all your investments into inflation-proof assets, you could get hammered if deflation trends end up gaining momentum. If you’re just looking to protect your investments, spread out your risks and exposures. If you’re looking to get rich off gold, then well, you better understand what exactly you’re getting yourself into and what the possible consequences.

What are your thoughts on gold?