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


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

  1. Ron Says:

    “[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:

    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:

    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:

    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:

    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:

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

  7. Stew Says:

    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:

    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:

    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:

    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.

  11. sean kduggen Says:

    gold as an investment carries no counterparty risk, cannot go bankrupt and will never be worth zero – it has also outperformed every asset class over the last decade. as an inflation hedge, it has kept up with inflation for over 5000 years. your point of “Gold cannot be eaten, it cannot grow food, it will not cure disease, it cannot provide transportation by itself” is a fallacy as neither can guns, bullets or tools and you wouldn’t argue their usefulness – food cannot be stored at any temperature, would require warehouses to store large amounts and cannot be broken down into equal units of value, but i wouldn’t argue against having some.

  12. jazzy fame Says:

    What about the fact that prices dont really go up, its just the value of the dollar dropping. Every time the government ask for more money (usually in the billions) to do something, it makes the feds have to print more money that has no backing, making the federal deficit greater and therefore decrease the value of the dollar, which I was told is currently worth about 2 cents…So when everything hits rock bottom, will your 10k, be worth 200.00?? Hard to tell, but if you have a bunch of green paper, why not invest some of it into gold or SILVER to protect against the dollar plummeting…and if the Almighty dollar is done, will the value of Euro’s still be ok, or does it effect that as well… I personally think silver , which is about 18.00/oz is a better investment, cuz soon after the gold goes up to high, people will buy silver, and you can then sell ur silver shares to take advantage of the price increase while investing in real silver bars as well for times of inflation like these… Only the real Elite scumbags of the world know when and why to invest….so best bet , spread your chips out into numerous outlets and you have to make out somewhere…

  13. Financial Independence Says:

    On the last point – yes, barter is the most preferred method, when worst comes. But most of the people do not have land nor skills to grow food.

    While gold is a highly liquid asset, inflation proved. There has been so many “sudden” downgrades from “AAA” rating to junk recently, that one are struggle to maintain faith in them.

    I am not suggesting or advocating for gold. But there has been always advisable to keep annual salary as an emergency fund. Why not keep in gold / precious metals?

  14. Jack_of_all_trades Says:

    Talking about the disadvantages of buying gold, there are some major ones I may add. When purchasing gold the investor has to forget about the interest that his money the bank could have paid for his money. Quite the opposite, he has to dig some money out of his pocket, to pay for storage costs or a management fee for his gold, which is sometimes referred to as negative carry. But today’s market environment, the interest foregone is minimal and
    For example, instead of investing in gold , one could have instead bought a risk free asset such as US Government Bond. But this isn’t really a deal, with 0.35% in two years.
    But I strongly disagree with the ones who sustain that gold is useless because it has no utility. While oil can be used as fuel, corn can be eaten, steel can build bridges and buildings, all gold is really good simply because it’s hard to destroy, looks good and can be used in a few dentistry applications. But the very fact that it doesn’t have many uses makes it a suitable currency substitute. Oil cannot be a currency, as one day we will run out of it. Corn cannot be a currency, as we grow and consume corn so there is not a stable amount in circulation. Metals such as steel, copper are not suitable, as they are often “used up” in industries such as construction. Gold’s value derives from the same principles from which other currencies derive their value. The paper on which the dollar or the euro is printed has no value in itself. Gold can even be thought of as a currency where the central bank that controls it has set interest rates are zero forever and fixed the money supply forever. In an uncertain world, the certainty surrounding gold makes it a strong currency. Other currencies may pay interest, but they interest is minimal in the current environment.
    Another reason in gold’s favor as a stronger currency than paper currencies is that all the other currencies are designed so that they can be manipulated by central banks. The central bank controls the supply of and interest rate earned on the currency. Gold has no interest rate, so cannot be manipulated in this way. Gold is also in limited supply and cannot be printed at will by central banks.

  15. Bill Nast Says:

    Stew, interesting point about gold only returning 1% per year or so. That doesn’t even beat inflation. However, have you seen similar headlines about diamonds? Diamonds are allegedly coming into short supply and won’t last forever. Surely, gold will suffer a similar fate eventually.

    Can you imagine if it goes into short supply like diamonds, how much gold jewelry would cost?

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