Investing in gold? Does it make sense?

You’ve heard of people investing in gold in case financial catastrophe hits. Is it wise? Well it depends on how bad you expect things to be. If you expect the climate to be hyperinflationary like 1920s Germany where one needed wheelbarrows of money to buy something it might make sense. See below. That’s real money that isn’t worth the paper it’s printed on! They papered their walls with it and burned it for firewood. Really.

However during normal times this may not make much sense. But central banks buy gold! I read about this in the financial papers! The banks of China, Russia and Germany have all been increasing their gold reserves and moving their reserves home from abroad. Yes, this is all true. Central banks buy gold to back up their currency. What else are they supposed to hold? Paper to back up more paper? Just because they hold bars of gold doesn’t mean you should. You don’t have a personal Fort Knox to store it anyways.

Gold prices have risen a lot over the past year due to fears about inflation and economic slowdowns. Also, the rise of $17 trillion in negative and low yielding debt has contributed to this. These are loans that pay negative interest. You put in $100 and get $98 back. Sounds terrible right? Compared to those gold looks like a winner as you are not guaranteed to lose.

Also the excess money printing has contributed to high inflation. See below from 1920s Germany. A real headache for Gutenberg, the inventor of movable type and the printing press.

Advantages of gold

  • A store of value over time as in millennia as it was scarce. The Romans used it for coins as did the Greeks, Byzantines, Egyptians, French Empire, British Empire etc.
  • Can be used for jewelry
  • Used in electrical applications nowadays
  • The amount being mined is limited
  • A good inflationary hedge. Gold tends to do well in times of high inflation as not much more is being made
  • A classic safe haven asset it times of trouble. It tends to do well.
  • Money after all isn’t worth the paper it is printed or maybe it’s just one and zeros on your computer screen
  • Will be the only money worth anything if there is hyperinflation. See below. Yeah gold rocks in a situation like this.

20 Gold Marks looks like this. That sure would have been handy to have during these inflation times. It is about the size of quarter US dollar.

Disadvantages of gold

  • There is no return unlike a bond or stock. You just hope it appreciates in value over time. There is no dividend check or coupon payment.
  • It’s just a yellow metal. It only has value because people say it does and is pretty.
  • Could drop in value if significant deposits are discovered or it falls out of favor
  • Storage problems: Where do you plan to store it? At your house? In a safe? What if you get robbed? If people know you have a bunch of gold bars under your bed they are going to want to rob you or burglarize your place.
  • Need to pay to rent a safe deposit box or store at a bank to deal with the storage problem
  • It is heavy and hard to transport
  • High transaction fees at dealers and coin shops (bid/ask spread)
  • Worries about counterfeits: There are many examples of fake coins and bars with tungsten cores. They weigh the same as gold bars and have the same dimensions but are worth much less. See below.
  • You can’t just sell part of a gold bar. It’s not like a loaf of bread where you cut off a slice when you want to pay for something. It’s all or nothing.
  • See my post on buying gold bullion coins for further information.

So gold is not really an investment vehicle as we see. What investors do is hold shares of gold ETFs or mining stocks to get in on the action. An example would be Barrick Gold (GOLD). These stocks usually track the price of gold. You should not buy much gold as an investment in lieu of stocks, bonds, funds and the like.

If you do insist on buying some gold for fun you can do these things.

  • Don’t buy a lot. A few or so coins for fun but that’s it. You don’t want to rent a safe deposit box too. That costs money. I have like five coins so not a lot. A few you can store at your house.
  • Buy coins at spot price not coin collecting value. It’s a commodity so commodity prices apply.
  • Only buy from reputable dealers or know how what you are buying.
  • Know how to check for fakes. Coins for example can be weighed, tested via ping test, measured and often have intricate designs minted on them that are hard to counterfeit. If you’ve seen many of the same coin you know what is right and not. I buy from ebay dealers or know what I am getting.
  • Buy big coins for smaller premium to spot price . Good examples are 20 Franc, 20 Mark, US eagles, British Sovereigns. See my other post on coins.
  • Stay away from bars even the prepackaged ones. It’s hard to check if they are fakes as you can’t take them out of the case/box to test them. Counterfeiters can break into the real packaging a replace the real thing with a fake.
  • See my other post on how to evaluate and price gold coins.

If you really think the world is going to end you will want to buy food, farm equipment, a farm, seeds and a hunting rifle to shoot some deer. But again there are survival and prepper blogs for people into that sort of thing. I even read in Barron’s about rich people buying condos in abandoned missile silos in Kansas to prepare for end of days. Crazy stuff. How do they plan to get there? There may not be an airport to go to from or flights there or an airport when they arrive. And who is going to work there? What will prevent hungry people from stealing their food? Are they planning to call the police? Too funny. It will be like Mad Max.

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