Headline:  Good as Gold??


Body: I read an interesting article in Investor’s Business Daily, about Gold.  The link to the full article is below.

Gold is the store of value that many investors are encouraged to run to when they are unsure of the direction of the stock market.  In August, prices were near $2,070 per ounce and is approximately $1,860 now.  This would seem to indicate weakness in the gold market, but Berkshire Hathaway just made a major investment in a gold exploration firm, so, there seems to be some difference of opinion.

Gold has a very long  history as a store of value.

2,000 B.C.E., Egyptian and other traders began to use gold jewelry as a store of value, but some would get a very good deal, and some would get bamboozled by others.   So, starting in 560 B.C.E., there began to be gold-currency that carried a seal of some political power to imbue it with an official value.  The U.S. used to be on the “gold standard” meaning that each dollar printed entitled the holder so some quantity of real gold, but this reliance ended in 1971.

How would one use gold and gold-mining stocks in a portfolio?

Most investors seem to use investments in gold as a hedge against inflation worries.  Currently, nearly every nation in the world is pumping liquidity into their markets and keeping interest rates low; This makes some people very worried about inflation. (In point of fact, a significant amount of assets in the balance sheet for the International Monetary Fund, is held in gold.)   Added to this, it appears that U.S. currency might lose its place as a world reserve currency (what will replace it is unclear.)   But, gold will still be gold so people might migrate there in an attempt to hold value in their money, as the U.S. Dollar weakens.

How can the small investor get in on this investment?

  1.  The small investor can purchase gold coinage or bullion.  But, choose this option and you also have to pay for insurance and secure storage.   Please figure these costs into your investment.
  2. The small investor can buy these gold-mining company stocks directly in the market.  If you do this, understand that the stock prices are often volatile.   If you are serious about one company, look carefully at the dividend history and the dividend payout ratio very carefully.
  3. The small investor can also purchase an ETF that purchases gold-mining stocks.

However, there seems to be one more way.   Finding and exploiting a gold mine is both risky and expensive, and there are companies that have sprung up to “help” gold-mining companies in this initial funding; These companies are called “royalty companies.”   Royalty companies typically loan investment money in return for rights to buy gold later at below-market-prices. 

If one wants to get in on this profit, but at a lower price point, perhaps one should consider an investment in silver.   Silver is a precious metal (It used to be 1 of the 2 metals that backed U.S. currency) and has industrial applications.    As manufacturing is currently down, before it ramps back up significantly, they need to invest in raw materials.  In this way, one might profit from an investment in silver.

Conclusion: Should I flip a coin?

I think the conclusion depends a lot upon the time horizon that you have in mind.  If you have a tranche of money earmarked for your retirement in 1-2 years, an investment in gold could make sense as a store of protected value.   (This is especially because the value of gold seems to have a significant reverse relationship with interest rates, and it seems that in the near future, national governments will exert effort to keep interest rates low.)  But, if you have a longer time horizon, you might be better off putting your investment money elsewhere.   It has been estimated that over several decades, an investment in the stock market has yielded a return of 6.5%, and an investment in gold just over 1%.


How Can I Invest in Gold? (investopedia.com)

The Beginner’s Guide to Investing in Gold | The Motley Fool

How To Invest In Gold – Forbes Advisor

Gold as an Investment: Should You Buy It? (thebalance.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA

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