Is it worth investing in gold?

Malthusian

I wonder if anyone was as crazy as my husband and ''invested'' in Northern Rock:). Never had the same problem with gold.

If he invested a high percentage of his assets in Northern Rock's shares then he was crazy. That was an extremely high risk strategy and the fact that he lost money surprises no-one. If by "invested" you mean deposited, he lost nothing.

The equivalent to putting a large chunk of money in Northern Rock shares is not investing in a gold ETF. The equivalent would be buying a load of gold bars and storing them in your house. That creates a risk of total loss, because someone might nick them.

By buying a gold ETF you pool your investment with others and in doing so more or less eliminate the risk that someone nicks your gold. The equivalent investment for equities is therefore a FTSE tracker.

When ''investing'' in shares you are ''speculating'' that the company will do well and the money invested will be returned with a handsome profit.

You're confusing investing with speculating. If you're investing, you spread your investment over hundreds or thousands of companies. Once you are sufficiently diversified, the statement "the companies will on average do well and return my money with a handsome profit (over a sufficient timescale)" ceases to be speculation and becomes a near certainty. When you invest in equities, unless you fail to diversify, or engage in other high-risk practices like borrowing to invest, then the investment will return better than cash over the long term. This is proven by a) evidence (compare total returns with dividends reinvested - not the FTSE 100 market price - with cash returns) and b) reason (no-one would invest in equities if there was no reward for doing so).

Gold is shiny metal. Buying it in the hope the price goes up is pure speculation, not investment. If that's what you enjoy, more power to you, personally I prefer the dogs.

AndyT678

Catie_the_Investor wrote: »

I'm afraid I don't agree. When ''investing'' in shares you are ''speculating'' that the company will do well and the money invested will be returned with a handsome profit. You may invest much time in investigating a particular company, but you can't be certain that your investment will do well.

You're right that sometimes companies don't do well for various reasons but the point is that they are actually trying to do something. There is a plan to use money to conduct business and hopefully make a profit. Their activities drive our economy and shape the environment that we live in. Gold does nothing.

ColdIron

Catie_the_Investor wrote: »

I wonder if anyone was as crazy as my husband and ''invested'' in Northern Rock:). Never had the same problem with gold.

You would have had precisely the same problem with gold if you had "invested" in it 6 years ago when its price hit $1,900

racing_blue

What about the beta?

Sure, gold is a volatile investment, the price may go up or down a lot. But not necessarily in the same direction as other investible assets.

A few months ago we had market conditions where bond funds were highly valued due to record low interest rates, and equities were at record highs, but gold was a long way off its peak. So I can see why someone wishing to reduce their investment risk might have considered it.

gadgetmind

racing_blue wrote: »

Sure, gold is a volatile investment, the price may go up or down a lot. But not necessarily in the same direction as other investible assets.

Yup, holding 5-10% in gold is fine, perhaps even 25% if you're that way inclined.

Malthusian

Sure, gold is a volatile investment, the price may go up or down a lot. But not necessarily in the same direction as other investible assets.

Whenever someone touts "non-correlation" as a benefit of some investment I ask: why would I want an investment that does not go in the same direction as investments that consistently go up?

It is true that theoretically, an investment which consistently went up in the long term (over and above inflation) but whose short term movements were uncorrelated with equities would be a very good thing to own.

There is, however, no evidence that gold consistently goes up in the long term over and above inflation - this thread is full of good examples. And indeed no reason to think it ever would, since all it does is sit there, being shiny.

Alarm bells should instantly go off as soon as people start talking about "non-correlation" as a benefit. In addition to gold, the same thing was said about life settlement funds and the Arch Cru funds. (And anyone who invested in them certainly did get returns which did not correlate with the stockmarket.)

gadgetmind

Malthusian wrote: »

Whenever someone touts "non-correlation" as a benefit of some investment I ask: why would I want an investment that does not go in the same direction as investments that consistently go up?

Because there is no such thing as an investment that goes consistently up. Different assets classes, and even assets such as equities in different territories, bounce around with varying degrees of correlation. If you then rebalance between these (annually or whatever) then you get one of the only free rides in investing.

Malthusian

In the long term a widely diversified portfolio of equities will consistently go up. By which I mean that over most long-term time periods, short term fluctuations and individual failures will even out and a portfolio with reinvested dividends will be worth more than the original investment. I apologise if my meaning was unclear.

Gold will not. Hence it is true to say that gold is uncorrelated with the stockmarket. It is a misunderstanding of portfolio theory to say that this is a good thing.

gadgetmind

Malthusian wrote: »

Hence it is true to say that gold is uncorrelated with the stockmarket. It is a misunderstanding of portfolio theory to say that this is a good thing.

https://en.wikipedia.org/wiki/Modern_portfolio_theory#Diversification

Introducing an uncorrelated asset such as gold or bonds, to an equity portolfio, can both reduce volatility *and* increase returns.

Similarly, introducing a small holding of equities to a bond portfolio, can both increase returns (perhaps obvious) but also reduce volatility (less obvious).

racing_blue

I believe that over time the price people will pay for scarce resources will rise:

a) if they become more scarce
b) if people can pay more
c) if there are more people