We get asked about investing in gold from time to time and our advice is usually the same (see our 11/20/09 blog). A recent article by The Economist entitled “Gold: Store of Value”, helps explain why the “value” of gold is based on uncertainty of the major economies and currencies, not sound investing principles. The article points out the following ideas listed below, but is also a very good read on real life details about the supply and demand of gold.
- Gold, as an investment, produces no income and has minimal industrial use besides jewelry.
- During periods of low interest rate, the opportunity cost of holding gold is low so it seems more attractive.
- Gold attracts people who fear weak currencies or the riskiness of sovereign debt during times of economic turmoil. But can gold really replace paper currency?
- Investment demand for gold has actually outstripped actual jewelry demand. Its attraction lies mostly in the hope that its value will rise.
- The supply of new gold has actually been flat or declining. Supply of gold for the market has come from existing vaults at banks and from scrap (jewelry melted down).
According to the article, “where the gold price heads in the future depends on the answers to three questions. First, for how long will investors keep piling into gold? Second, if and when they quit the market, will the demand for jewelry revive enough to support the price near recent levels? Third, how will supply respond if the price stays high?” Read the article to find out the full details and you’ll see why investing in gold may just be another form of “market timing”.