If you listen to news radio for any length of time, you’ll hear several commercials touting gold as the current best possible investment. As a guaranteed way to protect your money and the safest investment ever. So should you invest in gold? The simple answer is yes, but not the way these people are suggesting.

Gold’s Place in Your Portfolio
If you have a well-rounded portfolio, then gold and other precious metals have a place in them. Because they generally move against other investments, they’re considered a hedge against inflation. It should not be your entire portfolio, nor should you aim to own a big pile of gold unless you like looking at it.

Does Gold Lose Value?
Like any other investment, gold can lose value, and in fact has lost value. Because its value is based in US Dollars, the price of gold has risen and fallen over time. Its price is influenced by world events, inflation, and current market sentiment. In fact, gold lost significant value between 1980 and 2008. If you bought gold bars or coins in 1980, you probably still haven’t fully regained the value relative to inflation.

How to Invest in Gold
There are four primary ways to invest in gold: gold coins, gold exchange-traded funds, gold mutual funds, and gold futures.

Gold Coins
If you want to personally possess your gold, then you need to buy gold coins or bars. The advantage is that you own the physical gold. The disadvantage is that it’s more difficult to quickly trade.

Gold Exchange-Traded Funds
Gold ETFs buy gold and hold it for its investors. You then buy shares in the fund as you would any other fund. This is significantly easier to buy and sell, but you don’t directly possess any gold.

Gold Mutual Funds
Gold mutual funds generally invest in precious metal mining companies, rather than the metal itself. It’s a stock fund like any other stock fund, but one that focuses on a specific market segment. If you have a diverse portfolio, you can include gold and precious metals as one segment.

Gold Options and Futures
Gold is traded on the commodities market like oil and other resources. You can trade on the expected future value of gold, however this activity should be reserved for experts only. It’s very risky and you can easily lose money.

Will Gold Protect You in an Emergency?
Many people are touting gold as a way to possess a liquid asset in a major emergency or global meltdown. The idea is that gold has intrinsic value and therefore can be used to buy things if the dollar is severely devalued. Personally, I see a couple of problems with this theory.

First, most people don’t own or understand the value of gold. A store clerk isn’t going to accept your gold krugerrand in exchange for a bottle of water. Most banks won’t exchange gold for cash – it must be sold to a dealer, which doesn’t make it truly liquid. If the dollar collapses, you’ll have to learn to barter your gold for goods, but no one will agree on what it’s worth. In addition, people may doubt whether a gold coin or bar is real. We can estimate the value of gold jewelry, but we’re not used to looking at it and valuing it in monetary form.

Second, and this gets pretty theoretical, but ultimately gold has no intrinsic value. It’s a hard lump of stuff that comes out of the earth. You can’t make fire or energy with it easily. Therefore, it really only has a representative value. Europeans looked at gold and decided it was worth something. The Mayans looked at cocao beans and decided they had value. In order for an object to be useful as a medium of exchange, it must have an artificial value placed upon it. Gold, and all other precious metals, are currently valued in US dollars and the price rises and falls on the spot market in relation to other factors increasing or decreasing the demand for gold. If the economy collapses, the spot market may not continue to exist, which would eliminate the primary method of attaching value to gold.

If you’re going to hoard something in expectation of a disaster, hoard food, blankets, and other items you can actually survive on. Gold won’t keep you warm at night. However, if you just want to diversify your portfolio, then a 5% stake in a precious metals is something to seriously consider.

Comments

One Response to “Should You Invest in Gold?”

  1. Money Hacks Carnival #69 - The Dollar Bill Edition | Own The Dollar on June 17th, 2009 4:07 am

    [...] presents Should You Invest in Gold? posted at Sound Money [...]

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