It’s hard not to notice that gold is over the $1,300 an ounce when newspapers, TV and Internet remind us of it on a weekly basis. The reason for the increase in gold price is fear. The fear of chronic government deficits, risk of recession, risk of inflation, as well as the devaluation of our currency compared to that of other countries.
But before you decide to buy gold, think about these five items:
- Gold has not served as a good inflation hedge. A broad basket of commodities is viewed as a better inflation hedge than gold alone. In the past two decades oil has been a much better inflation hedge. Everyone uses oil and it’s something we must have at this point. When inflation increases so do prices. Not so with gold.
- There is little demand for gold for industrial purposes or jewelry. What has been driving gold prices up is fear.
- As the economy improves with more jobs, bringing about an increase in gross domestic product, and less fear in general, the demand for gold will fall as will the prices. What do you think is more likely to happen — the economy getting better — or worse? Most experts expect it will get better over time.
- There is no interest or dividends from owning gold, which is unlike bonds, stock or real estate. A buyer’s only upside is that another buyer will be willing to pay more than what you paid for it (less any transaction costs, commissions or storage costs).
- Anyone interested in buying gold now is late to the party. Think back to the housing boom when people borrowed money in order to buy a rental house at sky high prices only to find the bubble break, and are now underwater on their “for sure investment.” Just because prices for gold have gone from $215 per ounce to more than $1,300 does not mean it will continue. The fundamentals don’t warrant it.
When it comes to investment decisions you need a game plan or strategy for the long haul. It’s often unwise to make decisions based on short-term events because whether the situation is a certain way one week, or one month, or one year, the events will be different and unpredictable.