Investing in Gold? Beware the Hype!

Gold has made quite a spectacular run. It has increased in value almost 100% over the last four years. Analysts give us a variety of reasons for the spike. Some talk of gold’s intrinsic value. Others talk of gold as a hard asset that offers stability in uncertain times. Others try to offer a technical explanation, relating the increase in commodity prices, including gold, to rising inflation and the fall of the dollar, attempting to illustrate some magic rule interlocking all of the above.

The fact of the matter is that gold is, for most people, a terrible investment.

The first common refrain I hear is that gold is at an all time high. This is a half-truth. In absolute dollars, gold has never been this high before, ever. The last time it was anywhere close to being this valuable was almost thirty years ago, in 1980, when gold suddenly rose to $800 per ounce. That’s the problem. After adjusting for inflation, gold is no where near an all time high. For gold to be as valuable now as it was in 1980, gold would have to be selling for about $2,400 per ounce. If you had bought gold in 1980, and sold today, you would have lost money after adjusting for inflation. That’s why the statement that gold is at an all time high is a deceptive half-truth.

The reason people keep repeating that gold is at an all time high is to try and build momentum. If gold has increased 100% in the last 4 years to hit new all time highs, brokers and dealers want you to know this to encourage you to buy now, thus adding momentum to the rising price of gold to try and keep increasing it. After all, they generally get a commission. You, on the other hand, get an expensive ticket to the casino that is the commodities market.

The second common statement I hear about gold is that it will never be worthless. This may or may not be true. Gold is subject to the same laws of supply and demand as every other commodity. If there is suddenly too little demand coupled with an over supply of gold, it will become worthless. How is this possible? Gold’s main uses are electronic components and jewelry. If a better, cheaper conductor than gold is found, then it will have no use in electronics. If the average consumer’s tastes in jewelry change from gold to silver and platinum, then it will no longer be used to make jewelry. Are these likely scenarios? No. Are these possible scenarios? Yes. In an age where the stocks and bonds in your portfolio can suddenly become worthless in a matter of minutes, the idea of buying an asset that can never lose all of its value is appealing. Unfortunately, no such thing exists. Even gold can become worthless.

The third common statement about investing in gold is that gold protects you against inflation. Unfortunately, it might not. Inflation is the problem of too much money chasing too few goods. In theory, as the amount of gold is relatively stable, it should rise lock-step with inflation. The same amount of gold being chased by an increasing amount of money means higher gold prices. It’s the law of supply and demand. Unfortunately, that’s not guaranteed. In an inflationary economy, people could spend all the extra money they have on something other than gold. In that scenario, you have the same amount of money chasing the same amount of gold, and all the extra money from inflation is used to buy stocks, oil, groceries, etc. It’s still the law of supply and demand. Gold does not guarantee you protection against inflation.

So just how can an average Joe take advantage of high gold prices? While I don’t recommend investing in gold directly, now is a great time to sell scrap gold. Interestingly, gold parties have become the latest craze, and a lot of people have gold jewelry they don’t wear anymore that they are selling with friends at gold parties around the country. Now would be a great time to recycle those old pieces of gold jewelry you haven’t worn in years or will never wear again. Just because gold is too dangerous to invest in doesn’t mean you shouldn’t pick up a couple hundred dollars for recycling the gold you’ll never wear again.