Is it worth investing in gold?

ValiantSaint

Hello everyone,

I have posted on here a few times about where to save my money (and to get a decent return) but I'm still none-the-wiser about what to invest it in.

I was chatting to a friend and they suggested investing in gold. Is this a worthy place to stick my money? Now, bear in mind that I only have less than £5k to use - would it be worth it?

I mean, gold always recovers, right?

Many thanks in advance.

ColdIron

I'm keen on gold but I don't kid myself that it's an investment, it's speculation pure and simple

I was lucky and got in during the 'Brown Bottom' (2000/2001) but I could just as easily have bought in 2011 at a price we may never see again

Gold is a good hedge against inflation/currency devaluation (think Argentina or Zimbabwe) but in the UK it's shiny and nice to own

Buy some by all means, but an investment it is not

bowlhead99

ValiantSaint wrote: »

Hello everyone,

I was chatting to a friend and they suggested investing in gold. Is this a worthy place to stick my money? Now, bear in mind that I only have less than £5k to use - would it be worth it?

I mean, gold always recovers, right?

Certainly if you had paid over $1900 for an ounce of gold in 2011, you'd have been saying "gold always recovers, right", for the last four years. You would have said it in 2012 when the price fell below $1600, and in 2013 when it fell below $1400, and later in 2013 when it fell below $1200, and now when it's at $1100.

The fact remains that there is no history of the gold price ever falling from $1900 and recovering, or ever falling from $1500 and recovering. In the billions of years of evolution of the planet, up to 10 years ago, nobody ever wanted to pay over $500 for an ounce of gold (apart from a short freak period in the 80s). Now people are looking at $1800 or $1900 and thinking ooh it will be nice when it goes back to that correct level after its temporary fall, I will make money. Well, it clearly wasn't the correct level, although yes if you have a couple of decades to wait, it might well do that.

Gold is a terrible "investment" as compared to most actual investments, it doesn't do anything. It doesn't grow in size. It doesn't have massive industrial demand compared to what already exists or can be pulled out of the ground. It doesn't pay an income. It just sits there and costs money to store and insure.

Whereas, companies grow in size over time and/or pay dividends; loans to companies and governments pay interest; commercial and residential properties earn rent. You are just taking a gamble that someone will someday pay you more to buy this dumb lump of metal, than you paid today, and that in the meanwhile, nobody will discover an alternative mineral or invent a synthetic material that takes over as being better or more desirable for jewellery or electronics.

Clearly, if the price of bread and milk and petrol keeps going up over time and people are willing to pay as many loaves of bread or barrels of oil for your ounce of gold in the future as they are today, then you will "make money". But you won't have actually made money in real terms. Meanwhile you could have invested in a portfolio of companies or portfolio of properties which would also preserve their value in real terms AND paid an income as you went along.

In 2011 the price of gold went sky high for a whole bunch of reasons. The economy was in crisis, governments had been printing money like nobody's business for a couple of years and interest rates were on the floor. So gold was relatively more attractive (or perhaps you could just say it was less unattractive than usual) compared to other things. It still paid no income, but then neither did things like bank deposits or government bonds and there was a risk that the interest rate on cash could even go negative. People feared company bonds or equities could fall back in value to their 2009 floor. So gold was not a bad place to be which is why it was temporarily more than tripled in price, compared to five years earlier in 2006.

Of course, these things don't last because economies always recover. The US and UK stopped printing money like water. Gradually over the last four years, we have been getting closer to the day when bank base rate goes up from its all time lows. These low interest rates in the US and UK were not normal and had never been that low in the whole history of the banking system. So as we began to see light at the end of the tunnel, the silly gold price came back down *towards* normal. It's still comfortably over double what it was a decade ago, but that's money-printing for you.

World governments are talking about the central bank base rates starting to tick up over the coming years. Europe and Japan are still running their printing presses but won't do so indefinitely. As the world normalises and interest rates for central banks and retail deposits increase, along with bond yields, this shiny metal sitting in the corner of a room will start to look less and less compelling as an investment opportunity.

I can't see that being good for your eventual sale price unless you're willing to wait multiple decades. And if you're investing/speculating for multiple decades you should probably try to find an investment which is likely to return more than inflation, rather than merely keep pace with it.

Still, don't let me put you off. It might be great. If you think it's a good opportunity, by all means buy some as one small part of your investment portfolio

Aretnap

Invest in a fishing rod and in ten years time you wil own a fishing rod, and many fish.
Invest in an acre of farmland and in ten years time you'll own an acre of farmland, and ten harvests of food.
Invest in a house and in ten years time you'll own a house, and ten years worth or rental income from your tenants.
Invest in a share in HSBC and in ten years time you'll own a share in HSBC and ten years worth of dividend payments.
But invest in an ounce of gold and in ten years time you will own... an ounce of gold.

That's the fundamental problem with gold as an investment. It produces no income, it has little in the way of practical use (jewellery aside) or inherent value, your hope for a return is based entirely on the hope that in the future someone will desire it more than you do today. They might or they might not - nobody can say. Beginning in the 1980s the gold price dropped continuously for about 20 years - there's no reason why that can't happen again.

There's an argument to be made for holding some gold as a part of a diverse portfolio which also includes shares, bonds and property, but it's not something that many people would recommend putting all or even most of your money into.

What you should do with your money depends on a number of factors - such as how long can you afford to lock it away for, do you have enough cash to cope with unforseen events in the meantime, and how much risk are you willing to take with your money in the hope of getting a better return in the long run?

atush

At todays prices? I say no.

the time to invest in gold is when no one else is talking about it or buying it.

ChesterDog

ValiantSaint wrote: »

I mean, gold always recovers, right?

Many thanks in advance.

No need to ask - why not just Google gold price chart and look at the stark facts?

george4064

Aretnap summed it up very nicely indeed.

mvarrier

Out of interest, did any of the cash for gold companies that sprang up and were advertising on TV get badly burned by the drop in price or had they all set their margins appropriately?

Thrugelmir

mvarrier wrote: »

Out of interest, did any of the cash for gold companies that sprang up and were advertising on TV get badly burned by the drop in price or had they all set their margins appropriately?

They got burned.

Kendall80

I did consider allocating a small % to the investec global gold fund recently when the gold price dropped below 1100. Instead I put on a cheeky spread-bet and made a quick £80

racing_blue

Great answers from bowlhead99 and Aretnap

But on the other hand, if you research "peramament portfolio" or "Harry Browne" you might encounter the view that gold can have a place in a diversified portfolio precisely because it is not like cash, shares, or bonds. Its value changes to a different rhythm.