Is Gold a Safe Investment?
February 26th, 2009Is gold a safe investment? Short answer: yes. Does that mean it won’t lose value, and you should invest in it? Not necessarily. But it is pretty.
What makes gold safe? First, for this post I’m using the term safe rather than good. Safe means you are likely not going to lose all your money, such as with a bank CD; but it doesn’t necessarily mean it will give you a great return, again like a bank CD.
When considering whether an investment is safe, it’s important to check your assumptions and remember that everything’s value is subjective (supply and demand play heavily into this concept).
For example, in the city, people would be willing to give me more money for gold than for bottled water, because there is a good supply of water. However, if you find a man stranded in the desert with a trunk full of cash, he’d probably spend it all on your bottle of water rather than your gold.
Like most metals gold is valued, because it is useful, plus it happens to be prettier than aluminum. Gold’s beauty adds to it’s utility and value. It’s strong, so you can make a toilet that will support Ed McMahon. It conducts electricity. You can also make jewelry out of it.
In general gold has an inverse relationship with the value of the dollar. The more the value of the dollar drops, the more expensive or valuable gold becomes—commodities tend to follow this pattern. If the dollar loses value, your gold will be worth more. If the dollar increases in value, your gold will be worth less. Of course supply and demand will also factor into this scenario.
For example, let’s take an extreme case. If the U.S. economy completely collapsed, gold might not do you any good; people would be seeking the necessities, such as food, clothing, shelter, and toliet paper to go with their gold toilets. People don’t want your gold, if they can’t trade it to somebody else for those necessities. However, if Mexico’s economy was still strong, aside from knowing that the end of the world must be near, you could take your gold to Mexico and get something for it, even if only for the purpose of making jewelry. In contrast, you could take your dollars there and nobody would give you anything. The dollar has no value other than as a means of exchange. Gold, on the other hand, can serve a desired function other than just as a means of exchange, which causes value.
So is gold a safe investment? Yes.
Is it a good investment? We’ll save that answer for another post.
Please share your two bits on the safety of gold as an investment.
Subscribe to RSS
I'm Michael Crowther, and I'm passionate about sharing the peace of mind that comes from budgeting, saving (including debt elimination), and investing.