Investing in Gold ~ The Golden Problem


When you think about it, gold is a strange investment. It’s a metal that has very little practical value. You can’t make pipes, buildings, tools, or weapons out of it, it doesn’t conduct electricity nearly as well as the more available copper. It’s a soft, flimsy metal that does nothing but look pretty.

And yet, there’s a fascination with gold.

All currency, when you get right down to it, is an illusion. As a society, we convince ourselves that the little pieces of paper in our wallet (or bits of data in our bank account) have value. As a result, we behave as if they do; we exchange them for food, clothing, shelter, and everything else.  We accept them in exchange for those things, too.

Gold has, throughout time, embedded itself as something of a universal currency. The vast majority of humanity believes that gold is valuable.  As a result, gold is valuable. It’s something of a mass delusion, but it means that this otherwise relatively useless metal has become a sort of universal currency for the world.

The problem with that is this: the exchange rate for that currency is the price of gold, which tends to be a little schizophrenic. Gold, sayeth the marketers, is a great investment because it will store your value through the tough times. Often, though, the exact reverse is true.

The Recent History of Gold Prices

Gold tends to fluctuate in price in an inverse relationship with the confidence we have in the other major world currencies, most notable the US Dollar. In 2007, the American economy began to tip. At the end of 2007, the price of gold was roughly $800.00 an ounce, up $200.00 an ounce in the space of a year.

Then, in 2008, the crash completed, and by the end of 2008 the price had hit $1000.00 an ounce, then dropped back down directly after the government bailout of the banks put a halt to the immediate downward plunge. The price of gold as 2009 began was around $900.00 an ounce.

A year and a half later, it would be up to $1,900.00 an ounce. That means anyone that bought gold in 2005, for roughly $550.00 an ounce made a 345% profit.  Tripling your money during a financial crisis? Really smooth.

So, where’s the problem? Well, the price of gold as of July 5, 2013, was a little over $1,200 an ounce. Now, that’s still considerably up from 2005, but the price is plunging and it keeps plunging.

A safe haven – Or is it?

Any time we have a financial crisis, there’s a rush to store value in gold. It makes a certain kind of sense, really; if the banks all fail and inflation goes haywire, gold’s a good deal. But if the fed does its job and modulates inflation (as it has during this crisis), and the economy turns around, then gold’s price crashes. Having all one’s value locked up in a chunk of metal makes less sense than putting it to work in a growing marketplace.

From 2009-2013, advertisers were all over the television, hyping gold as the great financial savior of your (child’s college fund, retirement fund, etc.)  Companies that had held gold during the good times suddenly wanted to offload it. Now there’s a host of people who bought gold in 2011 and have since lost more than a third of their value. Buying gold in the midst of a recession means you’re buying gold high, and when the economy recovers you’re going to end up selling low.

Any high-school-investment-club member can tell you that buying high and selling low is not such a great plan.

If investing in gold appeals to you, then step back for a moment and look at the historical price. Gold creates a bubble when all other bubbles pop, and the trick is to get in on that bubble. Remember, if you bought gold in 2005 and sold it in 2011, you tripled your money in the course of six years. So keep your eye on the gold price, because eventually it will hit a bottom. Then you’ll start to see a slow creep upward, matching the price line from 2000-2006, where gold slowly grew in value. Once you start seeing that pattern, that’s when you invest in gold.

The next recession is coming; we get hit with one every ten to twenty years, it seems. Sooner or later, our economy will drop again, and gold will become valuable again. The price will rise as our perceptions of all other currencies fall. Buying gold when that happens is a fool’s errand.  Buying gold before it happens is a good way to get rich.

6 Responses to Investing in Gold ~ The Golden Problem

  1. Great post, it’s good to see that others have the same outlook on gold. A former coworker of mine swore by hoarding it, that was when it was in the $1,600/ounce range. Gold was a bubble just like any other and it’s day will come again. There may be more downside to go though. Investors will also have to think about how they would play gold again by either investing in the physical metal or the companies mining it.

  2. Good info here, Peter. Thanks for clarifying when the best times to buy gold is. With all of the hubbub on the TV and such, it’s hard to tell what’s true and what’s a scam about investing in gold.

  3. I have to agree with you here Peter. I wouldn’t buy gold right now or if I really needed a return in the short term. But if I have time to wait I would certainly catch gold on the low and hold it. Its the buy and hold game with gold as it usually will start climbing back. The thing is not buying on the up tick. When I see everyone talking buy buy buy I would be the one selling my gold at a premium.

  4. I think gold has reached a bottom at $1,200, so it may be time to jump in again. I’d never use a gold investment if I needed a safe return, say college money for example, it is too volatile to take that risk.

  5. Peter Jones says:

    I don’t know, Pauline. Given the recovery numbers in the rest of the economy, I’d be hard pressed to say 1,200 is a bottom. Historically, there’s an inverse relationship between the speed of the economy and the price of gold. Home prices are up, consumer spending is up…I think we’re seeing a general recovery in the economy. I’m guessing there’s going to be a steady decline in the gold price over the next couple of years. It’s not going to be the dramatic drop we’ve seen in the last year, but it’ll still slope down.

    I plan on purchasing my gold investment in 2015.

  6. I view gold as a hedge against high/hyper inflation and currency collapse. Nothing much more than that.

    If you place a certain amount of risk on either of those events happening, then you should own some. If you don’t think the above can happen, then there isn’t a lot of point in holding it.

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