With financial hysteria setting it, some might wonder if it's time to buy gold or other commodities. Gold has been marketed as a "store of value" in uncertain times. But is gold (or other commodities) a good investment?
The rumor is that many hedge funds are liquidating their holdings to raise cash. This liquidation is bringing down commodity prices. Gold prices have come down somewhat. With the financial news recently, everyone is somewhat on edge. Even I'm not immune.
I was preparing for a trip last weekend while listening to the gloom and doom on talk radio. A few experts were predicting the next great depression. (Note to self, stop listening to talk radio).
So I started thinking that a small purchase (maybe $10,000) of gold might not be a bad idea. This was just a passing thought, I needed time to do some research, which I didn't have right then.
Over the weekend I talked to some of my buddies who have purchases gold. One of my friends buys gold purely as a hobby. He buys bars of gold and silver and gives them as gifts and has a small collection for himself.
You can easily buy gold from many places online. As the advertising on talk radio confirms, there is no shortage of companies ready to sell you gold. You can buy coins, bars (large and small) and strips. You can also get silver, palladium (a cheaper platinum alloy) and platinum.
If you don't want to bother with storing your gold like King Midas, you can own gold through stocks and ETF's. The SPDR Gold Trust ETF seeks to track the price of gold so shares in the trust are priced at 1/10 the price of an ounce of gold.
There are various mining stocks you can buy. While not a true investment in gold, the fortunes of mining companies rise and fall depending on the price of gold.
But is Gold a Good Investment?
You can buy gold fairly easily, but is it a good investment? I'm fairly skeptical of gold as an investment. First of all, gold is a store of value. Gold is purchased to preserve wealth.
Gold does not pay interest. The only way to make money with gold is to find someone who will pay you more than you paid for it. So if you adjust for inflation gold loses 4% of it's value every year. However, gold prices fluctuate widely based on speculation in the gold market.
In a true crisis, the grocery store is not going to take payment in gold coins. If a true financial crisis hits the US gold is not really going to do any good unless you can convert it to some kind of usable form.
You're better off stockpiling canned food, water, guns and ammunition than gold. You'll need to find someone who will accept your gold and convert it into dollars or some other currency.
I think gold is really only a good option for a very sophisticated investor. It's too easy to buy expensive good (like it's been the last few years) and then sell out low (when stock prices rebound). Just like any other investment there might be a place for gold in your portfolio but I don't think it can substitute for stocks.
Why Stocks are Your Best Best
Investing is gambling. You hope to make a return from you investment but you don't control all the variables. You pay your money and take your chances.
With stocks, you're betting on the US (and global) economy. You're saying "I believe the US economy is going to produce more value over time." Historically we can validate this argument. We've seen the world become more prosperous over time, not less.
With gold, you're betting that some kind of financial crisis will cause the value of your gold to rise. So in order to realize a profit you will have to sell you gold in a financial crisis. Once you've sold your gold, what do you do with the currency? Do you invest in stocks (a possible shrewd move as the market may be low)?
Personally, I'd rather take the bet that in the long run, businesses in the US and around the world are going to produce more value and more wealth. So owning a couple index funds (a total US market and a total global market) would allow me to capture the profits of every publicly traded company in the world.
Bases on historical evidence, this is the best bet to make. I might consider a small investment in a commodity index fund. However, I'd limit this investment to a small portion of my portfolio.
Will I Buy Gold?
I might buy gold at some point. If it becomes incredibly cheap at some point, I might do it either as a collector (gold coins) or through some small hedge investment like the ETF I mentioned above.
I just don't believe that gold is going to make me a large amount of money. I think my best option is the global economic engine. The combination of earnings growth and dividends is the best thing going.
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