Your Two Bits

Following up on last week’s post about gold being a safe investment, you may ask yourself, “Should I invest in gold?” My thought is probably not.

I’m sure that many people who read this will be screaming, “Aaah, you’re completely nuts! Everybody should own gold.” I’m open to being dissuaded from my current views; however, while gold has done well over the last 10 years, historically, the stock market has performed better.

I ran across this statement on Wikipedia that sums up my thoughts quite eloquently: “Gold is regarded by some as a store of value (without growth) whereas stocks are regarded as a return on value (i.e. growth due to anticipated real price increase plus dividends). Stocks and bonds perform best in a stable political climate with strong property rights and little turmoil,” (http://en.wikipedia.org/wiki/Gold_as_an_investment).
We have seen a fair amount of turmoil over the last few years, with the “War on Terror” and related efforts, which have likely contributed to gold’s increase value.

Ultimately, if you believe that the political structure is going to crumble or the economy will collapse, gold is a better option than the stock market—of course, you may also want to include some food storage, a gun, a port-a-potty, and cigarettes in that event (those cigarettes could become your most valuable asset). Nothing in life is risk-free. The political system could change to a communal form of government and you might have all of your property taken away from you. My bet is that those disasters won’t happen, so I’m keeping my money in the market.

I know this topic has some passionate people on both sides of the issue. I’d love to hear your two bits on the matter.

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• Is Gold a Safe Investment?
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Is 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.

Related Posts:

• Is Gold a Good Investment?
• Winning the Lottery
• Should I Pay Off Debt or Invest?
• Capital Gains Tax Rates