A lot of investment gurus tell you that gold is not worth buying. You should invest in shares and real estate. If you want less risk, bonds is the solution. Gold is seldom recommended. But the last couple of years, gold has outperformed both stocks and real estate. More and more people are asking the question, should I buy gold?
First of all, it is worth pointing out that the so-called investment experts are not completely wrong. Gold is not really an investment, at least if you want investments to pay dividend and have growth potential. Many shares, but far from all, pay dividend and if the business is successful, the value of the shares will grow. The same goes for real estate investments. Tenants pay rent which the owner gets and if the property is in a good location, the value of the property tend to increase over time.
Gold, like all other commodities, doesn’t pay any dividend, instead you will most likely have to pay for safe storage. And gold does not have any growth component. So if you buy gold, you are rather speculating than investing.
Gold has often been a poor choice, in the 1980s and 1990s, stocks and real estate rallied while gold went downhill. But in the 1970s and so far in the 21st century, the gold price has rallied. But if you ask most financial advisers, you are likely to be told that gold is not worth buying. After all, the gold price has rallied and if it drops back to the levels around year 2000, you would lose a lot of money.
The people who recommend that you buy gold generally look at gold as an insurance against inflation. As you probably know, money nowadays is not backed by gold any more. Governments can print as much money as they want. And some governments are printing a lot of money. Although the expression printing money is not used, instead the fancy term quantitative easing (QE) is used.
The Federal Reserve in the US has now started an open-ended QE. The Fed will keep on printing money until the economy has recovered. But the US is not the only country to drastically increase the money supply. And it looks like things are only getting worse. An increase of the money supply generally leads to higher prices, also known as inflation.
Inflation can be seen as a stealth tax. It is not a tax that is paid to the government but it makes you poorer. A low and predictable inflation is not a big problem but high inflation makes a lot of people poorer. The hyper inflation in the Weimar Republic crushed the German middle class and paved the way for Hitler.
But the Fed is more worried about deflation than inflation and is also confident that it can withdraw the surplus money when the time is right. Far from everyone is convinced about the later statement. After all, Alan Greenspan managed to get most things wrong and Ben Bernanke did not think that the subprime loans were a source of concern.
It is impossible to know if inflation will increase or not. But quite clearly, with the huge increases of the money supply, high inflation is a possibility. It is also quite clear that virtually all governments prefer inflation rather than deflation. So the risk of high inflation in the future has increased and the classic insurance against inflation is gold.
This should not be taken as any kind of guarantee that the inflation will skyrocket but if you haven’t protected yourself against such an outcome, you are either very optimistic or very gullible. Protecting yourself against inflation is not easy, especially since you don’t want to paint yourself into a corner where you need high inflation in order to avoid getting poorer.
As mentioned, gold is one way of protecting yourself against high inflation. But there are also other ways, well located real estate works well in most scenarios. Also shares can be good during times of high inflation but it is much more difficult to pick the right shares than finding good properties.
How much of your fortune should be in gold? If you ask most investment experts, they will say zero percent. But we would recommend about 10% as long as the QE operations are running. Given that it looks like QE is becoming popular worldwide, it may be prudent to increase the share of gold to 15% or more. But remember that as a long term investment gold has the disadvantage of not paying any dividend.
Here you can learn more about investing in precious metals.