Gold. It hangs around the necks of the wealthy. It bolsters economies both personal and national. It courses through the microprocessors that make our technologically marvelous civilization possible, let alone prosperous. In fact, gold – and our lust for and fascination with it – could easily be said to be as old and enduring as humanity itself. For the novice to investment in this and other precious metals, though, the matter of when and how to best proceed can be a daunting question indeed. Happily, investment in gold, as well as other precious metals not specifically discussed in this article (like palladium, silver, and platinum, for example), need not be frightening or confusing. In fact, it can be a fun and rewarding pastime for those of nearly all ages and backgrounds, generating profit both economic and educational. Simply keep reading to learn more.
SHOULD YOU INVEST IN GOLD?
This, obviously, should be and is the first question on the minds and lips of prospective investors. Most people understand that they ought to invest in something, but after all, with all the other investment vehicles to be had, why pick gold by default? That’s a good question, and the answer for it is multi-faceted. To be blunt, you should invest in gold because it is the best option for you in light of your future goals. Investors often find that gold makes a fine entry point to the market and the world of investment. In more complex terms, there are several factors to consider when picking gold as your instrument of choice, and accounting for these factors will make coming to your final decision easier. You can read more about each of them below.
Gold is a Limited, Tangible Asset: The heading says it all – gold, despite what you might think from seeing it seemingly everywhere you look, is actually relatively scarce. Warren Buffett (an unparalleled master of investment and business who consistently ranks among the top five richest people on the globe today) estimates that you could take all the world’s gold, melt it down, and turn it into a cube sixty-nine feet to a side. Put another way, the entire world’s gold would fit between first and second base at your local major-league baseball stadium… with room to spare. This is a tiny supply in the scheme of things, and that acts as both a pro and a con for investors. It’s a pro because it keeps the supply/demand metric constant and well-regulated (more on the consequences of that later!), but a con in that it makes hoarding, shortages, and other such problems quite possible, especially given modern technology, modern markets, and so on.
Gold Yields Small But Stable Returns: In terms of raw returns, gold may not yield the sort of jaw-dropping whoppers that real estate or a break-out stock or a tech start-up’s IPO can… but those returns (when they happen at all) are happy accidents. Gold, by contrast, has a multi-millennium track record of positive returns for those who invest in it. Where real estate bubbles can burst and stock markets can crash, gold remains firm, and has done for centuries. In fact, Claude Erb and Campbell Harvey of the National Bureau of Economic Research have shown just how stable gold’s value is and has been: A paper released by them shows that in ancient Rome, the cost of upkeep for one centurion and a legionary under his command was 40.9 oz. of gold. Today, the cost of upkeep for the equivalent – one U.S. Army private and his captain – is… you guessed it: 30.9 ounces of the same. With this example, it is easy to see that gold has produced a steady return above inflation throughout history (if it hadn’t, what was perhaps the most powerful army in the ancient world would not have been able to function). Today, this trend continues, with gold producing a steady +1% return above inflation according to two other NBER economists, Robert Barro and Sanjay Misra. This is roughly the same as T-bills, and slightly less than stocks and similar instruments.
The obvious pro, then, is gold’s remarkable ability to provide a continuous and dependable – but modest – return on investment. The reverse, and thus a con, is this: Other instruments, like bonds and stocks, can return more sooner than gold can. Again, though, this is balanced out by the fact that these are (at least potentially) very fickle instruments. Simply put, it’s a matter of how aggressive you want to be as an investor.
Gold’s Value is its Weak Spot: This may seem strange to new investors, at least at first. A potential newcomer to the gold market may rightly ask “If gold is a valuable, desired commodity, then how can it be bad that people want it? That’s what drives the market in the first place, right?” The answer, of course, is yes. But here’s the catch: The same supply and demand cycle that is inherent in the market means that gold prices will inevitably fluctuate, sometimes greatly. This can be viewed as a point against gold investment, since unlike its return, gold prices for the day, week, or any other period one might wish to examine (and which you can examine for yourself at any time by checking out real-time Monex gold prices) will fluctuate naturally over the course of time. In short, gold which costs $1,500 USD per ounce today may cost $3,000 USD per ounce tomorrow.
At this point, the intelligent and observant investor will note that this is true of every commodity in virtually every market. It’s a natural and immutable property of commerce – market activity is the heartbeat of trade. It’s what keeps the markets alive to begin with. Even so, it is worth noting that the price of gold can and does fluctuate with every bit of the volatility experienced in the stock market. But wait! There’s a silver lining. Unlike stocks, bonds, and the like, gold has a sort of “pricing window”, if you will, which these other investment vehicles usually do not enjoy. Remember supply and demand, and gold’s “realness” and relative scarcity? Here’s where it really makes an impact. Being a limited, tangible, non-fiat commodity, the markets and investors of the world all know, accept, and agree that gold has a certain real value, and that this value falls within a certain range. Return on one’s investment, therefore, is virtually guaranteed, even if specific pricing information can be hard to pin down with any long-term certainty.
Gold is a Portfolio Stabilizer: By now, the new investor or curious onlooker may be getting a trifle overwhelmed. This is a lot of information to take in, digest, and consider, after all, but don’t worry – this is the final point to be covered in this article, and it is one of reassurance.
The fact is that gold’s great utility is undisputed, whether you’re talking to scientists, artisans, or just some random person off the street. Everyone knows that gold is used for an almost innumerable number of things, and even small children like and desire it because it’s shiny. Peculiar to the desires and sensibilities of the investor, though, is the fact that one of gold’s many useful qualities is that of a portfolio anchor or stability injector. Gold, as it has been pointed out to the reader several times, is phenomenal at retaining value, where fiat investment instruments – bonds, T-bills, stocks, corporate shares, and so forth – are not. That isn’t to say that those types of investments are poor or unwise, merely that public perception and the vagaries of fate exert, or at least hold the potential to exert, a much greater impact upon them than upon gold. Consequently, one of the best things a gold investor, and indeed any serious investor, can do to diversify himself or herself is to add a small percentage of gold to their portfolio. This gold supply, small though it might be, will help hedge against the value volatility present in the rest of your investments, as well as giving you and your advisors and those with whom you choose to do business some measure of consequential peace of mind. Finally, if the financial landscape should ever truly begin to fall into ruin, it will serve as a last-ditch source of ready currency. Better still, with the proliferation of online and other hands-free investment options, investing in gold is now easier than at any other time in history.
So, what’s the take-away for the gold investment neophyte, and even for the old hat? Simply this: When it comes to this type of investment, you should be cautious, but not fearful. Do your research, make sound plans, consult your advisors… and then take the plunge, because it’s a great time to get into gold, even if you’re just dipping your toe into the proverbial pool.