Recently, gold has become a very popular topic in the world of investment and many articles and even books have been written about it. However, many writers have not spent time understand the nature of gold as an investment and their statements reflect this lack of understanding.
A common statement about gold ist hat no interest is paid on gold. This is perfectly true and even very important. It might bet he most important argument against investing in gold.
But what is it about gold that mainstream investors and analysts don’t understand? Investing in gold is not about speculating that the value of gold will increase. It is about speculating that the value of fiat money will decrease!
I recently saw a book, claiming that the gold price has built up a bubble during the last decade. After reading the arguments fort his statement, I found that the only basis the author had was the fact that the price of gold has risen about 600% during the last decade. This is so ridiculous that it is actually even funny. If you compare the development of the gold price in US Dollar to the increase of debt in the United States, it will look very similar. So in some way, the price of gold was stable, while the value of the US Dollar decreased significantly.
The total amount of gold mined increases slowly, currently at about 150.000 tons. This amount increases about as much as the world population increases. So if you divide it evenly, there are roughly 16 ounces for everyone (valued at around 15 kUSD). This figure has been very stable over the last decades.
The most important fact about gold ist hat there is only a fixed amount available. This is the relevant difference to currencies, that can be inflated upon overspending, thus devaluing money.
What is the true value of gold? The mystery of this question is what causes all the discussions and different opinions. There is a limited amount available. However, if nobody wants gold, the price will be low and if many people want it, it will rise. This mechanism ist he same as with other assets, fiat money, stocks and bonds. Speculating on gold means speculating that more people will want to own gold in the future. Whenever you have cash on you bank account, you have the same speculation on the underlying currency. However, the currency is most likely being inflated as the government prints additional money. So apart from day-to-day volatility, owning gold is better than having cash in your bank account. The purchasing power of gold has been very stable over the centuries. At the current price levels, gold does not seem to be overvalued.
Looking at the long term, however, preserving purchasing power will not be enough. Star investors like Warren Buffet have outperformed gold by far. Index-based investments could not necessarily beat the development of gold in the long term. Considering gold as the long-term vehicle to preserve purchasing power, it should be the benchmark to compare other investment classes with. The result of this comparison is, that the selection of individual growth stocks to beat the performance of the index is the way going forward for long-term investments. Gold can be used for medium-term investments when stocks are priced too high to add new positions as it is the preferred alternative to fiat money.
Investing in gold
May 15, 2012