Gold investing not the hedge or slam dunk one might think

Tin foil hat

Some people, including the tin foil hat crowd, extoll gold investing but it isn’t what it’s cracked up to be. Photo from Wikimedia Commons.

In the past few years, many asserted silver and gold investing was a good idea as other avenues of investment like stocks and real estate were losing value. It’s also thought to be hedge against inflation, but the truth behind gold and silver is a bit more complicated than the gold bugs let on.

Silver or gold investing has lots of buzz

There’s been some buzz in recent years, though quieter lately, about gold and silver. They are, after all, hard commodities whereas stock values are arbitrarily made up numbers.

Certain folks exhorted that gold and silver would be the only currency left after economic catastrophe, mostly while wearing foil hats to keep aliens from stealing their thoughts. Some believe that since hard commodities will always have value, gold, therefore, is a hedge against inflation.

The hedge crowd and the foil hat crowd have some points about silver and gold investing, in fairness, but they’re mostly wrong.

What are they talking about

The phrases “gold investing” and “silver investing” are incredibly ambiguous and, thanks to the press being morons, it isn’t always clear just what the hell they are talking about. Basically, as the FTC points out, you can physically possess it – nuggets, coins, jewelry, bullion – or buy silver futures or gold futures, commodities stocks.

One can also, as the Wall Street Journal points out, buy mining company stocks.

Hedge funds

As far as gold investing being a hedge against inflation – no. A few “all time highs” were reported, such as in 2011, according to CNN, when gold prices hit above $1,900 per ounce, or in 2009, according to a Bloomberg article from that year, at $1,227.50 per ounce.

Neither were. That came in Jan. 1980, according to CBS, when gold hit $850 per ounce. Adjusted for inflation using the Bureau of Labor Statistics Inflation Calculator, that’s $2,375.46 per ounce. Then, gold fell to $590 by Jan. 1981 and by St. Patrick’s Day 1982, $316 – $881, adjusted for inflation.

Gold lost half it’s value over the 1980s, started the 1990s around $400, ended around $300, according to Bloomberg, and by March 2002, hit $293 per ounce – $375 in 2013 dollars. Between 1980 and 2001, 65 percent of the nominal value and 85 percent of the real value of gold was lost.

It’s too volatile to be so for more than a couple years.

Recent activity

Gold investing and silver investing hasn’t performed that well lately. Gold prices, according to Businessweek, have dropped for five straight months. Silver isn’t doing too well either; according to USA Today, the iShares Silver Trust ETF, a silver bullion fund, dropped 46 percent between April 2011 and June 2012 and is down a further 3.3 percent this year.

How they are right

Silver and gold investing aficionados, “gold bugs” as they are called, have some points. Anyone who bought gold between 2002 and 2007 is sitting pretty – for now. As CBS points out, it’s volatile, long term, and likely a loser. One has to time the market for it to pay off and knowing the right times and places isn’t easy.

As to the foil hat lobby – they’re idiots. Money is an object that a group of people agree is a medium of exchange. If no one agrees anymore – like in a catastrophe – it’s worthless. What they mean is “if a socioeconomic collapse happens in the specific manner I hope it happens in.” That’s beyond ridiculous.


Wall Street Journal





USA Today:

Federal Trade Commission:

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