Why I will probably never buy gold

By Stew

gold

Important: I am not an economist or an investment advisor. Everything you read here is simply opinion based on my limited knowledge and (hopefully) a little common sense.

Lately, I have been hearing all kinds of advertisements for gold. Whenever my six year old sees those “cash for gold” commercials, she tells me to sell all our gold for money. The problem is that we have almost no gold . . . jewelry or otherwise and that does not look like it will change in the near future.

The other kind of gold advertisement is the kind that pushes gold as a good investment in poor economic times. An investment in gold is a “hedge against the falling dollar” or a way to “combat inflation”. I often see and hear supposedly credible pundits and celebrities pushing gold on television and radio.

But I do not buy their pitch completely. Though I share much of the negative outlook on the economy, I am hesitant to purchase gold as a way to protect my family financially for several reasons:

Buying gold is still an investment

If I purchased gold, I would only purchase real, physical gold, also known as direct ownership. I would not invest in gold by means of indirect ownership through certificates, accounts, spread betting, derivatives, shares or any method by which I do not have the gold in hand or safety deposit box. Indirect ownership seems to come with the same risks that all other investments bring. I am not against investing, but the point of buying gold is to hedge against the worst case scenario. If the worst were to happen, all investments will plummet in value.

Performance

Again, I am not an investment guy, but the reality is that gold has not really performed well as an investment. The price of goal has only averaged about a 1 percent increase every year. However, not that many people do not buy gold as an investment, but rather as a commodity that rarely, even in the worst of times, loses value.

Price

I simply cannot afford to put any money into gold. The way the price has jumped up recently would probably prevent me from owning even an ounce.

Intrinsic Value

This is the bottom line for me. Gold has no real intrinsic value. Gold cannot be eaten, it cannot grow food, it will not cure disease, it cannot provide transportation by itself. Common sense says that if inflation goes through the roof and life becomes a daily hand-to-mouth struggle, I believe that barter will become the preferred currency and all the gold in the world will not feed your family.

Money has value because the person to whom you give it is confident that he can exchange that same currency for necessary items. Gold holds the same type of value. If things go really bad and your family is able to grow or hunt food, you will survive. Even if people have extra food, they will be hesitant to exchange it for a heavy, useless lump that cannot be eaten or provide any practical function.

Like I said, I am not an economist or an investment expert. I am not completely sure that my thoughts on this subject are correct. What do you think?

Article by Stew

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11 Responses (including trackbacks) to “Why I will probably never buy gold”

  1. Ron Says:
    October 21st, 2009 at 7:31 am

    “[Gold] 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.” –Warren Buffett

    Another reason I won’t be buying it is the commissions the gold guys charge. Buy a $20 gold coin for only $500? … then you discover it has only one quarter to one ounce of actual gold, or less?

    News flash! I am selling good old American One Dollar Bills at 2 for five bucks.

  2. Mike Says:
    October 21st, 2009 at 9:14 am

    Gold, as many other resources is the object of pure speculation. The funny things is that it will only protect your money from inflation over a long period of time but will never do any other good.

    2000 years ago, a ounce of gold was enough to buy a nice costume for a ceremony. Today, an ounce of gold (worth about $1000) is still buying a nice suit or a nice robe. So if you want to protect yourself against inflation without living the fluctuation in the price of gold (going from $1000 to $900 and come back to $1000 in the same year), you are better off with real return bonds that offer more security, less volatility and an inflation adjusted yield.

  3. Mr.GoTo Says:
    October 21st, 2009 at 10:34 am

    I agree. Gold speculation is based on fear and supply and demand. If the price goes up, the supply will increase (more mining) thereby depressing opportunity for further price increases. I have asked this question repeatedly of gold speculators: How do you know when it’s time to sell? No one can give me a straight answer.

  4. Gina Says:
    October 21st, 2009 at 11:57 am

    I totally agree w/you Stew, for the reason you mention …

    “Gold cannot be eaten, it cannot grow food, it will not cure disease, it cannot provide transportation by itself.”

  5. Credit Card Chaser Says:
    October 21st, 2009 at 10:36 pm

    Why is it that you say that if you did ever want to buy gold you would never buy it indirectly? If I wanted to buy gold I would probably lean towards some kind of ETF that tracks gold prices rather than going through all of the hassle of buying physical gold.

  6. ZP Says:
    October 22nd, 2009 at 1:26 am

    I am happy to have gold instead of dollars, and you?

  7. Stew Says:
    October 22nd, 2009 at 1:30 am

    CCC, maybe I wasn’t clear, my point was not that an indirect purchase of gold was a bad investment. It might be a good investment . . . but as a hedge against an economic collapse, ETF’s probably aren’t going to do much good. IMHO

  8. Doug Digger Eberhardt Says:
    October 22nd, 2009 at 10:50 am

    The dollar index has been approaching its all-time low of just under 72 and gold broke out to a new high. It’s not rocket science.

    Since 2000 the gold/dollar dynamic has changed. Just look at the charts.

    Could we get a bounce in the dollar here and a fall in the price of gold? Sure. I wrote an article explainging why on my blog http://fedupbook.com/blog called “Is Gold Peaking For Now?”

    The dollar index hasn’t broken its March 2008 lows and until it does, gold shares are a risky trade at present. Nothing goes straight up or down eh?

    Will the dollar index at some point break below 72 again and gold break out to new highs? You can “bank” on it.

  9. Doug Digger Eberhardt Says:
    October 22nd, 2009 at 10:55 am

    Mr.GoTo,

    I’ve been replying to gold articles for quite some time. You are the first person to ask that question. I give you credit.

    My book will answer that question for you. I’m releasing it on Amazon soon. I’ve been selling the book for $97 at present but am lowering the price to the $20 range, combining it with my silver book. I just want more people to understand what’s going on.

    In a few weeks or so, Google “Amazon” and “Buy Gold and Silver Safely” and it should be there.

    Disclosure: I don’t sell gold. I write about it. I was a financial advisor who left the business to criticize it as well as take on economic and political issues of the day.

  10. ALEX Says:
    November 5th, 2009 at 8:13 pm

    Look the fact of the matter is that gold has gone from 250/ounce in early 2000 to over 1100 now! Thats clearly not a return of 1%/year… its a lot more…and 10x that amount if you were a speculator and bought it as a futures trade.