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Gold Investing for the Gold Skeptic

By Edited Feb 25, 2016 0 0

Gold investing is a controversial topic, at least among my circle of friends, all of whom are educated, financially knowledgeable, and self-determined. Many regular investors are not interested in gold, and often find it difficult to comprehend why "gold bugs" like to accumulate and hold the yellow metal. The arguments against gold investing are often similar. This article takes a quick look at arguments against investing in gold, and offers a few counterpoints to consider.

"Gold Has No Intrinsic Value"

One argument against gold investing is often that "gold has no intrinsic value." Therefore, the argument goes, you should not invest in it. To support this idea many people point out that there are few industrial uses for gold, as opposed to other metals such as copper. Many people also dismiss gold because it is sold mostly for ornamental or investment purposes.

Here are a few thoughts about this argument. First, even if much of the demand for gold is for "ornamental" purposes, that still is value, like anything else. Any tangible good has value to the extent that other people want that good. Even if the reason has to do with matters of taste or as a symbolism for power, that still provides value to gold. When you stop to think about it, a huge percentage of all economic activity in the world involves people who value things for their stylistic properties, or just because the thing itself is scarce. The entire fashion and clothing industries are the easy examples. But even the houses we buy and the electronics that we use also have a large element to them that have no utility other than to project wealth or status, by showing that the owner has something that most others do not. As long as human nature values such things, gold will have some level of value. So to bet heavily against gold on the grounds that some of its value is attributed to ornamental value is essentially to bet that somehow human nature will change dramatically. Also, gold indeed has industrial uses, such as in electronics due to its inherent conductivity and resistance to oxidation.

"Gold Offers No Dividend or Rate of Return"

Another argument against gold is that it pays no dividend like a stock or interest like a bank account. However, many investment asset classes pay no explicit interest yet offer great opportunity. In addition, if the price of gold itself appreciates over a long-term, this may more than offset this concern. As an example, gold price appreciation has far exceeded the typical savings account interest rate over the past decade. Of course that is not always the case, but that just means that gold is like any other investment – you need to consider the best timing, your risk tolerance, and historical performance over various periods of time.

"Gold prices are Too Volatile"

This argument against holding gold suggests that it is too speculative in nature. Many people bolster this argument by pointing out that it is difficult to tell what is impacting supply and demand (and therefore price) at any given moment, so therefore gold is not a good longer-term investment. Although it is true that prices can fluctuate, even quite widely, over the very long term gold has shown to hold its value. In 1971 gold was about $30 per ounce, now it goes for about $1100 or $1200. So gold's potential volatility is perhaps not a per se reason to avoid investing in gold, although this volatility should make you consider your investing time horizon carefully – just like you should do with any other type of investment.

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