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Is Gold an Investment?

All About GoldThe recent rise in gold has prompted some speculation on gold being an investment for the future. But is it?

In any investment exercise there are two ways to make money. The first is by the increase in the value of the investment and the second is by interest or dividends received on the investment. Investing is basically loaning money in exchange for a gain such as interest or dividend payments the amount of which depends usually on the success of the investment. Of course it is more complex than that as there are fixed and variable investments. Fixed investments are where an agreed amount of money is invested or 'loaned' for a fixed fee or interest payment. The dividends on variable investments will depend on a number of factors such as the success of the investment in terms of the profitability of the company, the management and market forces affecting that company among others.

Gold is somewhat different. Gold is not money, as some people seem to believe. Gold is a solid metal of a specific rarity and containing an agreed desirability above all other metals. It is not even the most expensive of materials, weight for weight diamonds are more expensive and even more so is Saffron. However it is that agreed desirability that makes the difference.

The price of gold changes not because the value of gold changes, it does not. Gold's intrinsic value does not change but the value of the currency required to buy and sell gold does and therefore gives the apparency of the value of gold changing. An ounce of gold today will still have the same value and purchase the same value of goods and services as it did 50 years ago. Just the value of the currency has changed requiring, these days, more of it to purchase the same quantity of gold or goods and services as it did 50 years ago.

Gold's predominant advantage in this wise is its asset value and hedge ability. This can be observed when the market drops. Gold is then used as a hedge against the loss of value of ones investment in the market. The price of gold increases and offers a balance against the losses that may be incurred when the market drops. Hence the desirability of gold increases and people are more prepared to expend more currency to own gold and so the 'price' of gold increases. There are no dividends to be had or interest gained by owning gold so technically it is not an investment as one is not investing to make a gain. One is simply trying to offset or hedge by reducing one's losses made with investments in the market place. The closest one can get to an interest payment or dividend in gold is by investment in a gold mine or company that deals in gold such as a jeweller or trader. But then it is more of an investment in that company or trader than in gold itself. Usually such entities have a broader range than just gold. Traders, for example will usually trade in a number of metals and or even shares. Miners invariably mine a number of metals and not just gold so their share price may depend on the value of other metals and their current price range.

So understanding the purpose of buying gold is most important. It is not an investment but a way of preserving ones asset value. As such it is probably the best one around.


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