Gold Bug

Gold Bug
Gold has one interesting attribute that makes it unique. Throughout all of the history of mankind, gold has been a currency. Why’s that important today? Because people still have a tendency to run to gold during times of uncertainty. Oil prices are going up? The gold bug bites them and they buy some gold. War is brewing? Inflation worries? “Time to add to my gold holdings.”

I see two big problems with this. First, we’re not on a gold standard any more – the value of money and the value of gold are independent of each other. Secondly, you can’t take a bar of gold to the grocery store and trade it for a loaf of bread – it’s not a liquid asset. In short, gold is jewelry.

I keep hearing people say gold is an inflation hedge. Now, it seems to me that most of the people saying this are the ones who are selling gold. But in fairness, let’s look at the math.

Wharton School finance professor Jeremy Siegel has some revealing numbers in his book Stocks for the Long Run. If you bought a single dollars-worth of bonds in 1801 and held it, you’d have $13,975 today. If you put that same dollar in stocks in 1801, you’d have $8.8 million today. What would you end up with if you had put that same dollar in gold? 14 bucks.

I don’t know about you, but I’m not planning to live anywhere near 200 years. And even if I was, there’s not nearly enough benefit in putting money in gold for the long haul. So what to do with gold? Some people speculate on gold, gambling on the ups and downs of the gold market. If you can buy gold low and sell it high, you can make money. But most people who buy gold aren’t speculators – instead, they get emotional about it, and keep buying more gold even when (like now) its price is at a high.

Gold doesn’t generate interest. It doesn’t earn dividends. There’s no profit motive inherent in gold – it’s just a lump of metal. In short, gold is not an investment – it’s jewelry. Use it to invest in your relationship, not in your financial future.

Tags: , ,

Post a Comment