This month we're going to talk about a somewhat taboo subject in investing: gold. There are those who still hold that gold is nothing more than a "barbarous relic", a literal lump of rock that, while shiny, produces nothing, yields nothing, pays nothing, and is essentially a way that financial companies have found to charge you for keeping money under your mattress.
On the other side are those convinced that gold is a necessary store of value in a world where paper money is backed by nothing more than the (perhaps rapidly eroding) "full faith and credit" of the issuing government. Our money used to be backed by gold and silver. Now it's backed by nothing. And in point of fact, there aren't even enough paper dollars to cover the amount of money in the US economy.
Gold bugs tend to get a bit of a bad rap and are lumped in with doomsdayers and naysayers of various ilks. But with gold at all-time highs over $2,000 an ounce, let's try and take a rational look at why and how one might invest in gold.
First, gold is a commodity, in the same way that oil or corn is a commodity, and therefore is impacted by supply and demand. Supply is basically mine production plus recycled gold. Demand is a combination of jewelry (about 50%), investment (25%), central bank buying (15%), and technology applications (10%). Supply has been coming down the last couple years while demand has seen an uptick in investment and central bank buying activity. It is perhaps not unsurprising then that price is up as both demand increases and supply gets tighter.
Second, gold is a currency of sorts - a universally accepted store of value and medium of exchange. As such, it should move opposite to the US Dollar - if the dollar gets stronger, it means that fewer dollars buy the same amount of gold; stated otherwise, if the dollar gets stronger, the price of gold goes down. Similarly, if the dollar gets weaker, the price of gold should go up. The dollar is currently its weakest in two years.
Bonus points for you if that previous paragraph made you think of inflation! Inflation is essentially a weakening of the dollar...which is why gold also tends to perform when inflation expectations go up.
There are two main ways to invest in gold - "paper" gold (futures or funds) and physical gold. If you like the investment case for gold, ETFs should be your first choice - they're relatively cheap, easy to buy and sell, and most of the ETFs are 100% backed by physical gold.
If you're more of a "hold gold because the world is going to end", you'll need the physical. The ETFs won't hold up to a solar flare that takes out the grid. Just bear in mind that you'll be paying up to 10% commission when you buy or sell the physical, and you'll need a safe or vault somewhere to hold it, and maybe insurance as well.
Also, consider that in such a post-apocalyptic world, a $2,000 Double Eagle (1 oz. gold coin) will likely not be of much use to you if you're trying to buy a sack of flour. You might be better off with the Half Eagles or Quarter Eagles...or even Silver Eagles or Philharmonics.
I personally think there's a role for gold in an investment portfolio. I also happen to be a bit of a numismatist, so if you would like to chat about either of those things, hit me up - email@example.com.
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