Source: http://www.australianminesatlas.gov.au/education/rock_files/gold.jsp
Gold is a metal which has captivated the hearts of men over the centuries; it is a metal that has been admired for its beauty. It is a metal which men have fought for… and even have died for.
Gold has been known to humans for thousands of years, and was used in the ancient Sumerian civilization all the way up until today. Today, gold is still an important metal, with monetary, industrial, and cosmetic uses. There are many options available to buy gold today, such as through ETFs, precious metal funds, pool accounts, and physical ownership.
So, is gold a good investment today? Well, usually when one speaks of an investment, one is talking about something that can be expected to generate income or future capital gains by adding value. When we look at gold, it doesn’t provide an income stream, it doesn’t do any work, and it doesn’t add value over time; it just sits there in a safe, looking pretty. As Warren Buffet once said, “It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
So, given all this, it seems kind of silly to place so much attention in gold. However, gold does have another very important use, which was in fact its primary use throughout the ages, and which should not be overlooked today: gold also acts as a store of value, and can be used as money.
What are the properties of gold that have made it the form of money chosen by civilizations all over the world, from ancient times to early modern times?
- Durability
- Gold is very hard to destroy. You can beat it down into a sheet, melt it, or even dissolve it in aqua regia, but it is still there and it can still be recovered. It cannot be made to appear or disappear by will alone; it is a part of our physical world.
- Scarcity
- Not only is gold durable, but it is also scarce. This scarcity means that a great amount of value can be exchanged in small quantities of gold, but it also means that the total amount of gold in the world grows rather slowly, and is limited by the amount of gold available and extractable.
- Malleability
- Although gold is hard to destroy, it is very easy to shape. It can be easily shaped into coins, bars, or artwork and jewelry.
So how do these properties make gold a desirable form of money?
- Due to gold’s durability, gold that was mined 4000 years ago is likely still in existence today. A gold coin from ancient times is worth just as much as gold today, and likely a lot more due to its numismatic value.
- Gold has survived the rise and fall of many civilizations throughout the course of history. Although a government can decide to reduce the value of its debts by diluting its money supply, it cannot conjure gold bars out of thin air. Gold gives protection against monetary inflation and currency collapse.
However, gold as money is not perfect:
- A future technological advance could make extraction significantly cheaper and easier, which would depress gold’s price; any advance which makes the dream of alchemy feasible at a cheap price could potentially make gold near worthless.
- Gold’s market price is still subject to manipulation as is any other market instrument, through tools such as naked shorts, and via general market phenomenons such as market bubbles and collapses.
What are your views on gold? Do you see it as a good hedge against government uncertainty, or just another speculative bubble? What is your idea of the perfect form of money? I will talk more in the near future on the history of gold and how it has performed as a store of wealth over time.
Hey,
I like this post. I wonder how much % you invest in gold.
Hi H,
I currently have 10% of my money invested in precious metals. Today, there is a lot more uncertainty and sovereign risk, with not only many small countries such as the PIIGS facing default, but with also one of the world’s biggest economies facing astronomical deficits and a debt spiraling out of control. With that in mind, I think it might be prudent to take this ratio up to 20% at least for the medium term. I am still thinking about it, since as I live in Canada I am not as directly impacted, but we still depend a lot on our exports so all of this turmoil will still affect us, so I feel it could be a decent move.
Thanks for the insight, I am thinking of putting some investment in gold too, though because of the high rise in gold prices, do you think it still be wise to buy gold now or wait? Will the prices go back down to the way it was last year?
Hi Anne,
When everyone and their mom is rushing to buy something, it’s often a good idea to wait until there’s a good buying opportunity. I’m not quite convinced that gold is there yet, because when you talk to people, most people actually don’t have any money invested in gold. That being said, I think a safe and prudent buying strategy is to purchase whenever there are small dips in the market or at least once a month, and gradually grow your position. That way you are only investing a bit each time, and you are averaging down your costs. If you currently keep 10% of your money as cash, then slowly convert half of that into precious metals, see how you feel about it, and go from there! Let me know how it goes.
something else to consider is that right now there is still only approximately 1% of the western world’s “public assets” invested in gold. Percentage wise, we’re a long ways away.
A good place for some very informative podcasts for gold and investing in precious metals:
http://financialsense.com/fsn/main.php
Thanks for the link Mike, I’ll go check it out!