Putting Gold Into Context
There are a lot of people out there who don’t understand the application of gold except as jewellery, like these poor fools. Let’s put aside the fact that the current spot price of gold is now almost at $1700. There’s a history behind it to put this all into context, an extensinve one I’m going to try to condense. Long before history was recorded, gold was sought after for its shiny, malleable qualities. Because of this, gold gave rise to the concept of money itself: portable, private, and permanent. Gold (and silver) in standardized coins came to replace barter arrangements, and made trade in the ancient days way easier.
Why I Like It So Much
Putting aside my dreams of dressing like Mr. T with thick gold chains around my neck, the most attractive quality of gold is its ability to hedge against inflation. Money as we know it today is actually a debt certificate for gold. So in other words, the dollars in your bank account are actually symbolic of gold. While the dollars in your bank account can lose or gain in value, gold on the other hand will stay firm over the long term. How firm? Back in the time of Nebuchadnezzar, a gold coin could buy you 350 loaves of bread. More than 3000 years later, a gold coin will buy you… 350 loaves of bread. Try doing that with a Canadian dollar.
What Could This Mean For Your Portfolio?
Let’s look at what having inflation-proof assets can do for you.
The strategy is called “capital preservation”. Imagine being 65 and having the markets drop the way they did in 2008. If you had an idiot advisor who told you to wait out the volatility, you’re pretty screwed. As you get closer to a goal, like retirement, you would ideally like to preserve any gains you make in equity or from your job and not risk losses for further gains.
This is a great time to look into buying gold. It’s for this reason that there’s been a recent spike in the purchase of gold. With the volatility in the markets, it’s seen as an investment bomb shelter no matter what part of the world is going to hell, since gold is universally accepted as a standard in currency. I remember talking to a friend whose plan was to put all their money into gold and when it was time to retire, simply go to the country with the weakest currency.
So depending on your situation, gold might not be the best choice, but it will never be the worst.
Anytime am getting some new and good information in your blog so keep on posting cheers!
I’m glad to know that. If you have any questions by all means let me know and I’ll make sure I write an article to address it.
Aaron, I remember when gold traded for very little. You would need to explain to me why it isn’t affected by everything else that makes investing so violatle.
Ahh. That’s a great question! I was hoping someone would ask. As most people who follow the markets can tell you, the spike in gold prices have happened quite recently. Gold doesn’t follow the rate of inflation exactly. It’s kind of a little bit faster than that. It’s sort of a “canary in a coal mine”. When the dollar inflates, fear of the dollar losing it’s buying power causes a freak out period where people buy gold to combat that. During these times all commodity prices rise like food, and gas. Since rice or wheat isn’t a standard currency people tend to not buy those.
I do have some old gold coins from my great great grandpa hanging out in the bank that I will give to the kids. Haven’t valued them in a long time.
Just as a side note, the thing that makes investing volatile is when you “set it and forget it” and open yourself to whatever market you’re invested in has to offer you. There are many hedge fund managers who know what they’re doing and have offered their clients great returns, year after year. Since most people don’t have the knowledge to invest like this themselves, they follow the advice of their advisors to “wait out the volatility” which is a load of crap.
As you know, I don’t go for the potential loss of fluctuation. I use guaranteed return investments, so I don’t have loss. But it is Set it and forget it.
Come to think of it, with your aversion to risk gold might be a great thing to add to your portfolio. Maybe start with 10% of your portfolio to gold. 1 oz coins trade for about $1700.
Interesting thought.
Interesting thing about guaranteed investments. They are often guaranteed since they are often issued by governments they can pay back the investment by simply printing more money which completely negates the benefit since printing more money raises inflation.
Very interesting.
One question, though. You’ve listed all the reasons why gold is a good investment, but I suspect that—as is nearly always the case—there must be some downsides to it. What are they, and why do you think the pros outweigh the negatives, exactly?
With the proper allocation, there is literally no downside. It’ll won’t do what you want. It’ll do what it does, but it’ll do it consistently and relentlessly. If you want high growth for long term goals, gold is not for you. If you want secure low growth for a short term purchase, gold is not for you. If you’ve built up equity and want to preserve it, gold is and always will be for you! The downside is the upside, simply in the wrong situation.
Ah OK. Very cool. In that case, what advantages exactly are the reasons that gold is better than investment in any other good? You’ll have to forgive me, this is probably really obvious, but my knowledge in the area is virtually nil.
Ah. No problem. It’s not necessarily better. What I was trying to express is that it’s not always the best, but it’s never the worst. It will always have some practical purpose. It will sometimes be the best choice. It will sometimes be a mediocre choice. It will never be a bad one since you will technically never lose anything. I hope I was able to clear things up. If not by all means let me know what specifically I can clear up for you.
Ah, fair enough.
Thanks for all the great information!
If you are looking into gold, remember silver has been performing pretty well for past few years too!
Don’t get ahead of me. That’s for next week.