The special case of gold

by Admin
Updated: August 3, 2020

The special case of gold as a macroeconomic indicator and its limitations as an investment

Although (like other commodities) gold is a raw material, most of the gold in the world remains more or less in its raw form. It does not corrode or otherwise go bad and it can be easily recovered from the things it is normally made into such as jewelry. Add to this the fact that relatively little new gold is being produced and you have a very stable amount of something that endures - two factors that make it useful as a financial instrument.

Perhaps also because of its long history as a monetary system (the gold standard), gold is regarded by many as something that will never lose its value and is viewed as a safe way of protecting wealth, especially when other markets are not performing well.

The price history of gold

Money tends to move into gold when there is uncertainty about the economy and this began happening significantly at the end of 2007 and then meteorically as the 2008 financial crisis unfolded.

Had you invested in gold around that time, you would not only have preserved the value of your investment, you could have doubled it (while many other investments lost money):

Gold price history late 90s to mid-2020

The new high price held more or less steady from mid-2011 until it dropped back in mid-2013 where it seemed stable until mid-2019 when it began another meteoric rise as the Coronavirus pandemic developed - most notably last month (July 2020) because, I suspect, political uncertainty began to loom large.

What is interesting & different about the current (2020) situation is that while the price of gold continues to record-breaking heights, the stock market has performed similarly instead of doing the opposite like we’d normally expect.

In my opinion, the price of gold continues to be driven by the established rationale - the “old” money - whereas the the price of stocks is being driven by a new generation of retail investors - the “new” money - who have only ever seen the market to go up.

Should I invest in gold?

There are two reasons to buy gold:

  1. When it is the safest place for your money, i.e. other investments will lose a lot or disappear completely.
  2. When the price is going to go up, i.e. buy low, sell high.

Investing in gold can be done through derivatives, but it is also quite easy to buy real gold.

Should I buy actual physical gold?

Unlike most other commodities, it is quite easy for an individual to buy actual physical gold.

You can purchase ingots or coins that you hold yourself but this is not without risk of fraud or theft.

The the arguably less risky approach is to use one of the established gold exchanges with Internet portals to invest in gold directly. It is, however, worth drawing attention to the two main downsides of these accounts:

  1. Storage fees. Gold is real and has to be stored safely so it costs you to maintain an investment in gold
  2. You cannot sell gold you don’t have, i.e. you cannot bet on the price of gold going down

So you can easily fail to get a good result.

Typically, you can expect to pay 0.5% per trade (buy or sell) plus 0.01% storage on the value of gold you are holding, with minimum fees (usually attributable to storage) of $4-5 per month. On a $1,000 play, you’ll need to get a return of at least $15 (buy + hold + sell), which is 1.5%, to break even and this doesn’t include any fees associated with funding your account or withdrawing from it.

Gold rules

An alternative to buying & selling gold directly is to treat its price action as a guide for other trades. As a golden rule: Make sure you know what the price of gold is doing and have a reasonable idea why, before making financial decisions.

More info

The history of gold as money, together with the classical gold standard and the Bretton Woods system at gold.org.

“Does it Still Pay to Invest in Gold?” at investopedia.com.

“How to Invest in Gold the Right Way” at fool.com.

“Tax-efficient investing in gold” at journalofaccountancy.com.

Internal links

AUD as an alternative to gold Investing in coins Wealth News Go to Articles
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