Here’s a rule you can bank on: When you hear television or radio advertisements urging you to put your money into a certain obscure investment vehicle with all-but-guaranteed massive returns in the future, it’s time to sell. Today gold fits this profile perfectly.
Many people have misconceptions as to what an investment really is. When you make an investment, you are loaning capital to an entity in hope that they will use your capital wisely to create wealth. Your purchase of 100 shares of MSFT is physically represented by a stock certificate, but that piece of paper represents an equity share in a company that will hopefully grow and prosper.
Using the above definition, gold is not an investment. When you buy 10 oz of gold, you will also likely receive some kind of certificate, this time it represents ownership of a certain mass of metal. Gold is a natural resource that does not “have babies”, and gold will never create capital. Buying gold can only be defined as speculative. You are purchasing a hunk of metal with the sole hope that someone along the line will pay more for your rock.
Past Returns on Gold
In January 1980, gold traded at $850 per ounce. Today in December 2005, gold trades at around $500 per ounce in spite of twenty-five years of inflation. This is no big surprise. Since 1980, business conditions have generally been favorable, and those who made real investments have seen large returns on their capital. Those who bought rocks still have the same rocks, except there’s far less demand now than there was back in 1980.
It makes absolutely no sense to own gold when inflation is running around 2% and short-term government tax-free bonds are paying a couple points above that. Don’t even get me started on the average yearly return on stocks of the last 50 or so years. The point is that there’s no reason to own an asset like gold that will never create capital when you can easily purchase cash flow-positive risk-free US treasuries.
The One Reason To Buy Gold
If you buy gold today you’re making a bet that the economy will not just go into recession, you are betting on a full-blown extended period of economic depression accompanied by massive inflation. The only time gold makes sense to own as an asset is when inflation is eating away at your currency very quickly while all investment opportunities look bleak and unlikely to produce returns. Think Great Depression.
We here at InvestorElite are not doom and gloomers. The reality of the situation is that the US economy is better managed than it was prior to 1929. Periods of extreme excess like the 1920s are limited by the Fed’s open market activities. Likewise, periods of economic slowdown are not as severe as those seen during the 30s.
The bottom line is that gold is a sucker’s bet for the average investor.