A Reasonable Question about Gold

Corey —  August 15, 2011 — 15 Comments

Gold Bars by Mark Herpel on Flickr       On Friday, Free Money Finance posted a link to Sound Mind Investing’s new and free ebook about investing in gold. You can sign up to get the ebook here if you’re interested. I’ve been reading about this issue of gold, inflation, and the declining dollar for a bit now so I thought I’d check it out.

       After reading it, I headed back to FMF’s site to leave a comment and was pleased to find an insightful comment from Rick Francis who writes at Pondering Money. Rick’s question was this: If you believe that the dollar will weaken, political gridlock will continue, and that these are bad things, why not hedge against inflation with something that hasn’t had a “meteoric” (as SMI puts it) price increase? And while you’re at it, why not choose a commodity that actually has practical uses like oil, real estate, or food? (Or if you’re really worried, shotgun shells and bottled water…my words, not Rick’s.)

       Take, for example, copper. Copper has a large number of practical applications while gold has only a limited few. Now I’m not saying copper is the right choice. I’m just giving you an example. Oil could be another good example.

       Here’s another one: real estate. Or even better, how about real estate with a commodity on it – land with standing timber. Again, I’m not saying these are the ideal alternatives for gold. Rather, I’m simply trying to make the point that there are some other commodities that you can make a better case for investing in than gold. So don’t try to take me to task for a possibly poor choice of replacements. The question still stands: can we find no better, more useful, more reasonably priced commodity to use as a hedge against inflation than gold?

Corey

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Corey is currently pursuing a Master of Arts degree in religion. While he enjoys learning and writing about Christianity, another one of his new passions is writing about personal finances in order to help others make wise decisions with their money.

15 responses to A Reasonable Question about Gold

  1. Great post Paul. I agree with FMF and you. To hedge any inflation I keep ahead on our needs i.e. food, clothing, non-perishable items, etc. I always buy on sale or at thrift stores. Smart buying is a good hedge against inflation.

  2. Gold has very practical application in the making of beautiful things like jewellery, works of art and idols. This is an aesthetic value that has always been recognized by the world except by a few very dense utilitarians such as Warren Buffet. Gold would have more industrial uses if (1) it weren’t so rare; (2) it didn’t have so much aesthetic value; (3) it wasn’t used as money. As it is, substitutes for gold are often much cheaper to use. But from what I can see, nothing is an adequate substitute gold in jewellery and art. As for money, you could hedge with copper or aluminium (my wife doesn’t appreciate my used beverage can collection), but where would you store it all? A small amount of gold very conveniently stores a lot of value.

    Finally, I would add that there is too much paper gold out there, and not enough people who have invested in physical gold to talk of meteoric rise in its price. If any thing, the price of gold is only keeping pace with the adjusted money base. Yet there is a lot of paper gold and silver out there, and that means that a meltdown in the dollar that will result in gold and silver shorts being covered could lead to more realistic price of gold in $56,000 per ounce range (or put it another more realistic way), the dollar could drop to 1/56000 of an ounce of physical gold.

  3. A NPR Planet Money podcast “Why Gold” found here:http://goo.gl/W6WRl

    Does a pretty good job of showing why gold has became the “thing” people use as money instead of anything else. While it may be smart to have some other things you mentioned gold has unique properties according to the podcast.

  4. Thanks for that, Jerome. The only problem there is that they rule out other elements and metals – not all other forms of commodities, like land for example. Also, they did narrow it down to four metals – palladium, rhodium, platinum, and gold. The only reason they ruled out platinum was because of its high melting point. That still leaves you with two alternative metals. And as far as testing goes, chemists can find a way to test for any type of element. The only reason it’s so easy to test for gold is because it has been most frequently used among the three. So people developed an easy way to test for it. If the others had been more popular, there would already be an easy way to test for them.

  5. I suppose I should say real estate is not really a “commodity” per the definition, but it has similar characteristics in terms of being a hard asset with utility.

  6. Peter, I agree hedging with copper wouldn’t be the wisest move. It was just a suggestion to get people thinking. I still have difficulty in seeing gold as having utility beyond aesthetics save for a few applications in electronics. But even in electronics the applications are limited. Even though gold is a great conductor you can’t really make wire out of it because it’s so soft (and copper is a better conductor anyway…). Now I’m not saying gold is useless. I agree that art has its uses. But in the scenario where world economies are collapsing and people are panicking – what good will gold do you? Even if it’s just one economy (like the U.S.), you’re going to eventually run into problems in all other economies because no one uses a gold standard any more.

    As far as paper gold goes, I certainly would prefer to own physical gold if I were going to invest in it.

    Thank you for patiently discussing this with me and not viciously attacking as many “gold bugs” do. I’m simply trying to ask questions and understand the issues better. I’m thinking I need to do some studying on economics. I had macro and micro in college but that was it. We didn’t really get into discussing national economies, the various approaches with their advantages and disadvantages, and other things like that which actually matter in the real world… :)

  7. Thanks for commenting, Donna! That’s a good strategy for short-term inflation, but it may not help much in fighting against long-term inflation. That’s why you have to look at investing in something to beat inflation over the long run. You need something that you aren’t going to be using up and that will also hold its value (and preferably grow in value) over time. But smart buying can certainly help – especially when using the savings to invest in assets that will beat inflation (not to mention the lower costs of buying).

  8. What a significant idea. I supposed by this time money are the usual things we used. I could say that this discussion would give us value. I mean there’s more valuable things by this time than gold.

  9. I am getting tired of hearing gold as a security against inflation. It is good to hear other alternatives such as real estate which I think is a really good idea.

  10. Thanks, Benjamin. I’m just trying to offer another perspective. There are alternatives and there’s no good reason to ignore them.

  11. http://gonzalolira.blogspot.com/2011/02/inflation-hyperinflation-and-real.html

    Real estate may not protect against hyperinflation, for, as we’ve seen in the US, the shrinkage of credit collapses real estate prices during times of hyperinflation. Lira points out that the South American experience is to have other assets besides currency, real estate and even farmland, all things that depend either on currency stability or availability of cheap credit –when high or hyperinflation hits, interest rates skyrocket and cause real estate prices to collapse. Real estate works sometimes as a hedge against normal inflation, except when there is a collapse of a bubble–but against hyperinflation the investment window is too long in many cases to help much, and the illiquidity of the assets makes it virtually useless as a means of providing stable, liquid asset in a financial crisis. In addition, real estate, as a hedge against inflation, usually means owning an asset that is far too large a position in most people portfolio. Gold and silver are thus better in my view.

  12. Peter – I was thinking the same thing when I replied to Benjamin’s comment. The advantage gold and silver have over real estate is that you can buy them in any amount you want whereas real estate (real real estate – not REITs) only come as a lump – generally a very big lump.

    The question that keeps coming to my mind, though, is what would really happen if there is an economic collapse as bad as the doom and gloom guys are proclaiming? If there’s a worldwide economic collapse and all our money become worthless – what really changes? We’ll still have all the resources currently available. We’ll still have our skills and abilities. The ground will still produce food. The sun will still shine. And so on. The only thing that changes is the value of our money. I’m not saying there wouldn’t be huge repercussions. But I don’t envision the world exploding or the entire collapse of all society. Maybe I’m too optimistic. :)

    But on a spiritual note, I am finding that I need to learn to trust in God’s provision and eternal protection more than worry about all the possible doom scenarios. And I do not say this to dismiss preparation or planning, but from what I’m seeing and hearing overall is that line has been crossed and it’s mostly worry, concern, and fretting that dominate our thoughts.

  13. In my reading of history, in such times, gold and silver remain worth something. Imagine yourself in a medieval castle, and a hostile foreign power comes to the gate and demands tribute. You say, we have bits of paper here with our king’s picture on its. They will reject that. But if you have gold and silver they will take that and there is a good chance that they will leave you alone, for now.

    The worst thing that can happen is a devastating war that destroys life and limb. In such times, gold has historically retained its value.

  14. Hey Paul, are there any books that you recommend I read about gold,stocks, and finances that will give me a good foundation.

  15. Hello Paul,
    You certainly picked a topic that is becoming more relevant as world economies, including our own,have become more unstable. You raise excellent points about other metals and commodities to invest in, although so many people are focused on gold investing right now. I read somewhere that the price of silver may rise as more people find it a less expensive metal to invest in, plus it can be used in manufacturing and for other industrial applications. I liked your statement that even if the worst happens, people still have their skills, the ability to farm, fish, hunt, etc. I think we sometimes forget that society hasn’t always relied on one type of currency. Throughout history, people used to trade and barter for items or services they needed; they also used shells, fur, and jewels for currency as well. I enjoyed reading your article and have now bookmarked your blog.

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