With the recent string of volatility in financial markets around the world, gold has become one of the hot-button topics in the investment world. Some say that because gold is a tangible commodity whose value is relative to its scarcity rather than its relation to the volatile global economy, it represents a wise investment in these uncertain times. However, others caution against gold because unlike a stock, bond or other financial instrument, it provides neither earnings nor income. Gold is not representative of anybody’s production. It offers neither the sure-fire earnings potential of debt nor the business-based growth potential of stocks. Gold, they say, is not an investment – it is speculation.
The History of Gold and its Value
Gold has a storied history as the former anchor for currencies around the world. A soft metal with few practical applications, its uniqueness and relative scarcity gave it a stable, if arbitrary, measure of value. Whether or not any given year was particularly productive or particularly barren, the price of gold remained the same, simply because the pricing system itself was based on gold. Gold was a stable currency, because it was used for nothing but currency.
Of course, gold-backed currency is no more. Proponents of gold investment claim that the 1970s loss of the gold standard is where everything went wrong. Without a stable measure of value, even an arbitrary one like gold, the economy would be subject to volatility that would eventually be detrimental to business and progress. Opponents, on the other hand, claim that gold was always a poor measure of value. Real production is the only thing with value, and therefore the only thing worth investing in.
What is the Value of Gold?
Opponents of gold investment claim that gold is a poor investment because its price is solely determined by demand for it, which is fickle at best. Because it is not productive, opponents worry that investors in gold will eventually come to a point where they want to do more than simply keep pace with inflation and have a shiny metal object. When this happens, people will sell their gold for stocks and bonds, the price of gold will go down, and gold investors will have lost their savings.
On the other hand, gold has proven to be more inflation-proof than most investments in times of volatility. Gold buyers do so because they believe that inflation will eventually outpace the gains that might be made through bonds, stocks and other financial instruments. The triple threat of currency debasement, stock market collapse and skyrocketing food prices has convinced many gold bugs that disaster is just around the corner. If this is your sober assessment of the global financial system, then gold has a lot of value to you.
What Are You Doing When You Invest in Gold?
When you invest in gold, you are investing in the off-chance of financial disaster. Gold may be a good investment precisely because its value is isolated from the rest of the economy because of its lack of productive capability. Even if the economy tanks, gold will retain its inflation-adjusted value, and you won’t lose your money in the long run.
Opponents of gold investment claim that investing in gold is not based on the logical rules of the market, where investing in real production translates into wealth creation. Gold bugs claim that neither is any other form of financial investment in the modern age. With frequent, opaque government interventions causing unprecedented currency and stock market volatility, the rules of the game, they say, have changed.
Only time will tell which side will be proven right. In the mean time, it might be a good idea to hedge your portfolio against all bets by trading on a gold exchange.