With gold at a six-year high, is now the time to invest? What determines the price of gold and what are ways one can invest in this precious metal? We also explore whether gold is an effective inflation hedge and store of value.
In this episode you’ll learn:
- How has gold performed as an investment over different time periods.
- How gold has outperformed inflation, but has not been a great inflation hedge.
- What are the challenges to gold being a safe haven
- How gold’s performance is driven by fear and momentum
- Why gold is a speculation and not an investment.
- Why Ray Dalio and Jim Grant recommend gold but Warren Buffett is more skeptical.
- How to invest in gold via an ETF, physical coins or the gold futures market.
Gold has been valued for thousands of years, but should you invest in gold now? In this episode, David lays out the map of gold’s history, what fuels the supply and demand of gold, and why investors should be wary of putting too much of their stock in the lauded asset. Does owning gold prove to be a good hedge against inflation—a sure-fire way of insuring against the ups and downs of the banking system? It turns out that the value of gold is entirely dependent on when it was acquired. Similar to other asset classes, gold provides the most value to those who bought it when the value was at a low point. Those who bought gold during its peak in the 1980s would have taken a loss. Why is it that gold—often considered the bedrock of asset classes—has proven to be untrustworthy as a hedge against inflation? Should it be trusted to provide value?
The reasons people choose to own gold
David explains that there are three main reasons people buy gold:
As a hedge against inflation
People believe that the value of gold will keep up with inflation and be a safeguard against any unwelcome changes in the economy. The reality, however, is that the value of gold has not historically matched the pace of inflation in the short-term. Gold rises and falls significantly in value. For instance, from 1974—2011, inflation varied about 5 percentage points on a 10-year annualized basis. Gold varied 26 percentage points for the same time period. Because of the volatility in pricing, gold simply cannot live up to the ideal of being the perfect inflation hedge.
As a safe haven
Some fear that there will be a geopolitical collapse causing the economy to go up in flames, and they believe that owning gold will insure them against the damage. To be considered a safe haven, an asset must be both unfaltering in its price—even while other asset classes waver—and easily accessible. David points out that gold has wavered in its pricing, isn’t practically carried or liquidated, and that it has been banned by governments in times past.
People believe that it is rare
Because many consider gold to be a rarity, it is the assumption that as the economy is thrown into disorder, investors and institutions will want to own more gold—creating a low supply/high demand scenario. Building a financial arsenal of gold will ensure that when times get tough, those that own gold won’t be left destitute. We have seen, however, that the value of gold doesn’t always meet that of inflation and isn’t a trustworthy value-meter.
The demand for gold is driven by fear
In the year 2018, there was 4,700 tons of new gold. The supply of gold typically grows 1.5-2% every year. The demand for gold in 2018 was 4,400 tons. With supply and demand being in close proximity, the idea that there will be greater investment demand in the future drives individuals, institutions, and even countries around the world to purchase and invest in gold. People believe that as the economy changes and falls into disrepair, the number of fearful ones will grow—creating demand that far surpasses the supply. Buying gold now will help keep you from buying it in the future when its price will skyrocket. Be sure to listen to the entire episode to learn about the bandwagon effects of gold and why jumping on the train might not be the wisest decision.
Why gold is a speculation rather than an investment
Because there is no full-proof way to predict whether the value of gold will rise or fall, purchasing or buying into gold stocks is more speculation than investment. There is a theory that the value of gold correlates to real rates. When real rates go down, the price of gold should go up. David explains, however, that real rates are affected by the price of treasury inflation-protection securities, or TIPS. We have already seen that the price of gold cannot be based on the behavior of inflation so comparing the future behavior of gold to real rates isn’t effective.
David also points out that gold is a global market—making its dollar price fall as the value of the dollar goes up. Because it also doesn’t provide any kind of income to the owner, it is difficult to value. No one knows exactly how much it is “worth” or how much it will be valued at in the next fifteen years. Owning or buying into gold is speculative. No one knows for sure how it will behave.
The best ways to invest in gold
Even though investing in gold isn’t necessarily a bullet-proof inflation hedge, it can be a strong part of your portfolio and net worth. The question is what asset will do well despite internal or international conflicts and if the dollar depreciates? Gold is still a strong candidate. Yes, its history is rather rough, but there are easy ways to invest in it or to purchase some without it overriding your entire asset portfolio.
Exchange-Traded Funds (ETFs), such as the iShares Gold Trust, IAU is a good option, as well as purchasing actual gold coins. Yet another option is gold futures, which have some stipulations but are treated well come tax season. A gold ETF you can own in your retirement account and not be taxed a collectibles tax if you sell it, but owning gold coins in your IRA can prove restrictive.
There are many ways to own gold, but it is important to realize that gold is a speculative endeavor. It isn’t an investment. The driving force behind the value of gold is the fear of investors, and while gold may be its own safe haven against the volatility of the world, it’s not the strongest safe haven for those who own it.
- [0:18] Gold may not be as strong as it used to be.
- [2:03] The performance of gold depends on when you bought it.
- [3:46] Why do people own gold?
- [4:15] Is gold actually a good inflation hedge?
- [8:07] Using gold to build a safe haven.
- [9:56] Investing in gold because it’s under-owned.
- [10:46] The supply and demand characteristics of gold.
- [12:25] The bandwagon effect of gold.
- [17:00] Gold is a speculation—not an investment.
- [19:10] Which asset will do best in an inflationary and distrusting economy?
- [22:44] How should you invest in gold?
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