Investing in gold has been on every front page in the last two, three years. The financial crisis has scared a lot of investors who lost faith in everything but gold. Many investors buy gold in some form, in paper or physical gold. Investing in gold is not something from the last couple of years, but has been around for many years. It's just that the last couple of years, gold has every characteristic of being a bubble. Gold investors sometimes seem to lose all good sense of judgment and logic. Buying gold has almost become a sort of religion.
My take on this is that investing in gold is just like investing in any other asset. Let's deal with this matter in the form of a couple of statements often made by gold investors.
1. "Gold will always keep its value, it can not be printed or created out of thin air"
The financial value of assets is only determined by its scarcity and how much other people would want to have it. Gold is a relatively scarce product and the available volume may increase only very slowly by the work of miners. Unlike paper money, this can not be done by a simple push of a button. This is what gave gold its good reputation. But it's only part of the story. Sure, because of all this, the value of gold will probably never reach 0,00. But as an investor you're only interested if it will keep its value after the investment is done. After all, the gold investment was done as a sort of safety measure. As investors we're not interested where price came from, we're interested in where price is going after the investment, just like with any other asset.
Also, why not buy oil? Gold will probably always be around and not get destroyed or burnt. At some point all oil reserves will be gone which will drive oil sky high. So why not buy physical oil? Sounds weird? Yes it does.
2. "You can never lose when investing in gold"
This brings us to statement number 2 which can easily be rejected by pulling up a long term gold chart. It's not a straight line from bottom left to upper right. Gold has been in a strong bull market since 2001, but has been in a bear market from 1980 until 2001. In the financial markets, there's never a sure bet. It would only exist for maybe a millisecond after which the new price would reflect the new balance of greed and fear. The price of gold fluctuates, like any other asset. Prices on the financial market are determined by how traders and investors perceive the future. This may change in positive and negative way every day and so does the price of gold.
3. "Some day, probably very soon, money will have no value. Gold then will become the payment standard"
Another story that gave gold its good reputation is of course the inflation story. Because of governments printing money, the value of money will decrease and, according to gold investors, will become worthless. No one can exactly predict the outcome of the monetary policy. Again, there is never a sure bet in the financial markets.
But more importantly, inflation will drive the prices of all goods sky high, including that of companies. So why not invest in the stock market? That will keep up with inflation just like gold. The investment profit will not create more buying power, it will only compensate for the inflation, just like gold. Making actual profit with investing in gold (under any sort of inflation) requires good entry and exit from the market, just like any other asset.
As investors are anticipating a certain degree of inflation, many assets like stocks and gold are going up. But what if at some point it turns out that the anticipated inflation will not happen? Then stocks and gold are really overpriced and prices will drop. So gold may be a protection against inflation, but the expected inflation at a certain point in time is already priced-in. So stocks and gold behave the same in that aspect. How we see the future is what determines price now.
Also, let's not forget, gold is just dead money lying around withdrawn from the economy. Investing in stocks will get you dividend and help the economy because it's helping companies.
4. "The world as we know it will come to an end and civilization will be thrown back 100 years or more"
In another article I've written before to never believe anyone who knows something for sure when it comes to trading and investing even if that person is you. The above is just one of many possible futures and probably not the most likely one to happen. Even the WOI and WOII or the crisis of the 1930's did not have had that kind of effect.
But if you truly believe civilization will come to an end, have you thought about investing in weapons too? Because who's going to protect you and your physical gold when all hell breaks loose? And how about piling up a huge food supply in your basement? If you're consistent in your reasoning, than that should be a significant part of the plan as well. If there's no food out there left to buy with gold, then gold itself will not be a happy meal. The price of gold may even drop. Who needs gold when there's no food?
5. "Investing in physical gold just feels good, you can look at it and actually touch it"
If this is the last argument to own physical gold, I would strongly suggest buying something you can actually use and enjoy. Doing investments based on the famous 'It just feels good'-indicator is one excellent recipe for disaster and gold is no different than any other asset that 'just feels' good.
Post edit January, 2015: look at how the price of gold has been hammered. Of course, the real gold bugs will always find justification for why it's good to invest in gold.