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Gold As An Investment? Here's Our Take

We were recently asked to contribute some ideas for an article on gold as an investment, here was our response:

I think it is commonly believed that the primary benefit of gold is that, since its supply is finite, the price of gold will keep pace with inflation and protect the purchasing power of your investment. Over very long periods of time, this has certainly been the case:

There are some stories from the Romans that a 1 ounce gold coin could be used to buy a nice toga, belt and shoes. Today, 1 ounce of gold (about $1,300) would buy you a very nice suit, shoes and a belt…about equivalent attire considering the times. So you could say gold has done well over a couple thousand years in protecting your “purchasing power”.

However, over more reasonable periods of time, like the time frame that you or I are investing or saving for, there is no guarantee that gold will keep up.

The price of gold is subject to speculation just like any other tradable asset. Just look at a few examples from history:

In early 1980 you could buy 1 ounce of gold for around $650. By early 2000 that same ounce of gold was worth less than $300.

This is despite the fact that inflation in the early 1980s was very high (over 10%), and although inflation was tame through the 1990s, it certainly was not negative. Someone looking to protect their money from inflation in 1980 would have done very poorly by buying gold and holding it for the next 20 years.

Over the last 15 years or so inflation in the U.S. has been relatively low, yet the price of gold has gone from the mid-$200s in early 2000 to $1,800 in 2011. Here gold vastly outperformed inflation.

If your plan is to set aside money for the next thousand years, gold is probably a good choice for your savings to retain value. If you have a more reasonable time horizon of 10 to 20 years, there is no guarantee at all that gold will keep your dollars safe from inflation.

The article is published here: http://investaweb.com/20-experts-give-view-gold-part-1/

Matt Hylland