Yesterday’s post promised some direction when it comes to whether or not to buy gold, so here is my advice: no. Ok, thanks for reading!!
I will explain. Besides trying to be a wiseguy, I’m not saying that nobody should be buying gold, but I am saying the vast majority of people should not. Here are some of the reasons people might buy gold:
Price Speculation. This means that an investor might buy gold believing the price will go up. Isn’t that what we always do, buy something hoping the price will go up?! Yes, but here’s the problem: in yesterday’s post I pointed out that, unlike what can properly be called investments, there’s no data to analyze when it comes to gold. It doesn’t generate earnings, it doesn’t have a balance sheet…it doesn’t even give you a free toaster when you open a new savings account (sorry, very old and very bad bank joke). So what are you really doing in this case (hint: I gave away the answer yesterday): gambling. There is no way to make any kind of informed opinion about what the price of gold will do, so if you buy gold speculating that the price will go up, you’re not investing in gold, you’re betting on it.
Hedge against inflation: inflation is another one of those many things in the world of finance that are pretty much impossible to predict. Rooms full of people with Ph.D.’s in Economics try to do it, and rarely get it right. In this type of strategy, you’re not betting on inflation, you’re trying to guard against it. But is that really necessary? For most people, there is never any reason to do this. If inflation rises, and you find yourself forking over an extra $20-30 at the grocery store checkout register, running out and buying gold isn’t really going to do anything to change that. For professional money managers who have hundreds of millions or even billions of dollars to invest and protect, this might be a valid strategy. But for the rest of us it is not.
Store of value: some people buy gold as a way to diversify their assets. For those who are very wealthy, this might make sense. But it really doesn’t for the vast majority of the rest of us. Remember, you get no income from gold: it doesn’t pay dividends or send you interest checks. It just sits there. Do yourself a favor, particularly when you are young and just getting starting building your wealth: invest in something that will increase your wealth, not something that will earn you as much income as burying your cash in an old sock.
Coin collection: ok, if you’re a coin collector, buying gold coins might be what you want to do. But again, be aware that for most people this is far from an optimal wealth-building strategy. Don’t use your investment money to collect coins.
If you do decide you can’t live without buying gold, the best way is probably through a gold ETF (exchange traded fund) that buys physical gold and stores it, for a fee of course. Buying gold mining stocks is a poor way to bet on the price of gold, as in several past gold-price rallies, mining stock prices have actually decreased (though this is not always the case). The correlation between the price of gold and the price of the shares of mining companies is not as high as you would think. And if you buy physical gold yourself, prepare to also buy a safe and hope nobody breaks into it.
My recommendation is, particularly if you’re a college student or recent grad, ignore the news stories about the skyrocketing price of gold and the predictions it will go to $4000 per ounce (there are people predicting the Jacksonville Jaguars will win the 2020 Super Bowl, but I wouldn’t put a penny on that either). It's just as likely to go back down to $1000 per ounce as it is up to $3000. Invest your money the right way, which you can learn how to do by reading this blog. Besides, everyone knows Jacksonville won’t win the Super Bowl; the Saskatchewan Rough Riders will!
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