One often hears of gold (and other precious metals) as a “safe” investment. On top of that, there’s a recent trend of doomsday people who’ve added a chorus of “when the SHTF, you’ll want gold!”* I’m more optimistic about the future of society, and I don’t directly invest any money in gold. In fact, if I had physical gold right now, I’d be selling it. Warren Buffett puts it best, when he says:
If you buy an ounce of gold today and you hold it a hundred years…you’ll have one ounce of gold and it won’t have done anything for you in between. You buy 100 acres of farm land and it will produce for you every year. You can buy more farmland, and all kinds of things, and you still have 100 acres of farmland at the end of 100 years. You could buy the Dow Jones Industrial Average for 66 at the start of 1900. Gold was then $20. At the end of the century, [the Dow] was 11,400, and you would also have gotten dividends for a hundred years. So a decent productive asset will kill [i.e. outperform] an unproductive asset.
I’m not as smart as Buffett, so I’ll explain the same concept using charts. Here’s the historical price of gold over the past few decades (adjusted for inflation):
“Damn!!!” You might say, “Gold be goin’ through the roof! I gotta buy me some of that,” and that is how it appears. But let’s compare this chart to a different chart. Here’s home values through 2007:
Everybody knows how that one ended up. And here’s the NASDAQ composite up through 2000 (i.e. the dot-com era):
Aka the dot-com bubble. Seeing a pattern? These are all bubbles! I’m sure if I pulled up a chart of Tulip prices in the 1600’s, it would look the same.
Gold is in a bubble right now. The blingy stuff isn’t intrinsically worth more now then it was 100 years ago. It still has the same value. It makes pretty jewelry and is useful in many applications due to it’s malleability. Heck, it might even be worth more in 5 years then it is today.
But investing in gold is just like jumping into any other bubble: you hope that people in the future will be willing to buy your stuff at a higher price then you paid for it. Not because it’s worth more, but because everyone else wants it too. Go back and re-read that last passage. If that describes any of your investments, you know it’s time to sell.
In a hypocritical twist, my next post will be about why you should buy gold…in a roundabout sort of way.
* If the shit hits the fan so hard that the dollar is worthless along with all other investments, I’m not sure what good a shiny metal is going to do you, unless it’s in the shape of a knife or bullet…