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Health & Fitness

Should I Invest in Gold?

Blogger Gary Pia ponders whether or not to invest in gold.

All That Glitters Isn’t Gold. Nor Is Gold For That Matter.

Joni Mitchell wrote, “We are stardust, we are golden,” but she wasn’t offering investment advice about the shiny yellow metal that has captivated mankind since the dawn of time.  Gold is the stuff of dreams and legend and clearly has value, but is it all it’s touted to be as an investment?

The argument is made that gold is an inflation hedge. In a world where governments are countering massive deficits by pumping more and more money into the system – simply printing money basically—then the less valuable those currencies become.  Gold, so the argument goes, becomes more valuable as paper money becomes less. 

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The proof according to gold’s fans is in the price. In 1970 an ounce of gold could be had for $37 (USD).  As of 3/28/2011 that same ounce was valued at $1,420, a 3,738% nominal increase.  However, nominal returns don’t tell the whole story.  In real terms, the actual value of gold is still below the 1980 peak of $599 (equivalent to roughly $1,500 today).  In other words, even with all of its price appreciation, the underlying value of gold hasn’t changed much over the past 40 years.  Further, the metal has yet to pay a dividend and never will.

Warren Buffet’s well known antipathy to gold as an investment was recently on display in the Wall Street Journal. Mr. Buffet said that gold, oil and art are investments that don’t produce any income or product.  So, investors who buy these things are counting on them to become more attractive to other people in the future.  “That’s a whole different game” compared to investing, said Mr. Buffet.

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He continued that if all the gold in the world were condensed in one place it would form a cube 67 feet on all sides.  But, what could do with this cube?  “You can fondle it,” said Mr. Buffet, or stare at it, but it will not be producing any returns.  “You’re betting on the price of the asset not on the productivity of the asset.”  These are kind ways to describe what is known as “the greater fool theory.” 

If you remain unconvinced, hear are two primary ways to own gold.

Bullion and Coins

Buying the metal itself can be done, but there are challenges.  The price you pay will be marked up over the spot price.  The challenge is in not paying too large a premium.  Additionally, there are storage and security costs.  There is less of a premium to buy bullion than for coins.  Those of the survivalist mind-set who want to buy a loaf of bread with gold will need the smaller gold coins, like one tenth of an ounce, and will have to pay a higher acquisition premium.  Just don’t leave them on the dresser.

Exchange-Traded Products (ETPs) and Mutual Funds

Gold exchange-traded products are traded like shares on major stock exchanges.  Gold ETPs are an easy way to gain exposure to the price of gold, but without the inconvenience of storage and security. 

Typically a small commission is charged for trading in gold ETPs and a small annual storage fee is charged.  The annual expenses of the fund such as storage, insurance and management fees are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time.

Gold mutual funds typically invest in the shares of mining companies.  These do not represent gold directly.  If the price of gold rises, the profits of a gold mining company could be expected to rise and, presumably, the price of their shares.  However, there are many factors to take into account and it is not always the case that a share price will increase when the gold price increases. Mines are commercial enterprises, have significant capital costs and subject to problems such as flooding, geological events, structural failures, as well as mismanagement, theft and corruption. Such factors can lower the share prices of mining companies.

So, what is a better way to fight inflation? According to Warren Buffet, "Inflation is a very cruel tax," because it lowers the worth of your paper money.  He said one of the best ways to keep the value of your money growing is to invest in good businesses and companies which keep growing. That helps investors "maintain purchasing power no matter what happens to the currency," said Mr. Buffett.

That advice is as good as, well, gold.

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