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Is Gold an Investment? as published in InsideNova.com

Let’s get right to it. For my money, gold is not an investment; it’s speculation.

When you invest, you purchase a slice of human enterprise – a business or public work – or you’re lending your capital to the same. The success or failure of your stock purchase or bond loan is related to whether that enterprise profitably produces something of value to the world.

That’s investing. Gold, on the other hand, is a rock. It’s a shiny rock, I’ll give it that. But when you buy gold, you don’t expect it to increase in value because it has produced something. Instead, you’re basically betting that someone else will eventually value it more than you do.

That’s speculation. Gold prices do go up and down based on supply and demand, but the demand is usually from people who want to collect it, wear it, or, hope the next guy will pay more for it.

This is not much different than going to a casino, putting your money on red and crossing your fingers. You may make money, but you’re betting, not investing.

What about using gold as a hedge against inflation, or in case traditional money goes belly up, or for any of the other reasons you may have heard (usually from those who are trying to sell it to you)?

There are studies that have investigated these and other possible uses for gold.[1] Bottom line, if you hold gold in case of disaster, it’s worth first figuring the probabilities. If you assign 1:1,000 odds civilization might collapse, then figure a thousandth of your wealth should be in gold. For every other use that’s been suggested, I could name financial tools that have been more dependable for the same job. For now, consider this definition from Wall Street Journal personal finance columnist Jason Zweig in his tongue-in-cheek book, “The Devil’s Financial Dictionary”:

GOLD, n. What people think they will make piles of when they buy a shiny yellow metal that is useful primarily for melting into cuff links and charm bracelets.

Enough said.

 


[1] Erb, Claude B., and Campbell R. Harvey. “The Golden Dilemma.” http://sssrn.com/abstract=2078535.

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