Gold as an Investment

There are several reasons why people own gold, starting with owning it in the form of jewelry. Gold jewelry has always been popular, and it is a perfect metal to craft jewelry from, due to not only its beauty and its value but especially because of its durability.

Most of the gold ever mined since the beginning of time is still in circulation, and this goes back several millennia. In recent years, a fair bit of gold is lost by way of its use in manufacturing, but a lot of this is salvaged, gold used in wiring and cell phones for instance. Given the price of gold, salvaging it is well worthwhile from an economic standpoint.

Gold is also used as a hedge, both by individuals and by governments, and governments own huge amounts of gold. The idea with this is not so much to speculate gold but to use it to offset the risk of other investments or currency fluctuations, or to hedge against inflation.

Others own gold to look to make money off it, to own it or trade it with the expectation that it may be sold later at a higher price, the same way that people speculate on stocks, real estate, and all other forms of investment.

The gold that is invested in may be held for any period of time, from a lifetime to only a few minutes in the case where the speculation is of a shorter duration. We refer to these shorter term holdings as trading in gold though, and these trades may speculate on the price of gold either going up or going down.

We normally think of investing in something as involving the intention to hold it for at least the medium term, even though market conditions may have us selling it sooner than we may have expected when we bought it.

There is no set period where a trade becomes an investment, although investors generally have the intention of holding positions for several years, with trading involving lesser time frames of expected holding.

What separates these two strategies the most is that investors will buy gold based upon the value of the investment itself, the intrinsic value of gold causing its appreciation over longer periods of time, while traders will instead seek to capture fluctuations in the gold market, looking at not the value of gold itself but the supply and demand for it over a given time frame.

Principles Behind Gold Being A Sound Investment

Gold is a very scarce metal, and while we are not sure exactly how much gold is currently in circulation, above ground in other words, it is believed that all the gold ever mined would amount to a cube of about 20 meters in diameter, weighing about 174,000 tons. Of the approximately 2,500 tons that is mined each year, only about 500 is allocated for investment purposes, with the rest going to jewelry, dental, and industrial uses.

Gold as an InvestmentWhat this means to the investor is that the supply of gold is very limited as a percentage of the gold market, which adds a lot of stability to the market, where investors do not have to worry about a glut of gold hitting the market due to a huge gold strike that may spike supply and drive the price down.

This means that the price of gold is essentially demand driven, and it is not unreasonable to assume that the demand for gold will remain fairly high over time, as after all, this has been the case since gold first was traded back in ancient times.

Gold has always been a desirable investment to own, with the major limiting factor on this demand being people’s ability to buy it, where in good times people can buy more due to having more money to invest and in bad times they may have less to invest in it.

This is the case with the stock market as well, which is one of the competing investments with gold. Good times economically drive prices of stocks up as people have more money to invest, and during recessions there is less money to buy investments in general including investing in stocks.

What really separates gold from stocks though is that during these down economic cycles, while people have less to invest overall, they will invest a larger proportion of their funds in gold than with stocks, and will very often sell stocks to buy gold.

The reason is that gold is more stable as an investment than stocks, mostly due to the value of gold being much more durable than stocks. When companies do poorly, their stock can go down and do so for a very good reason, and the value of stocks is therefore contingent upon both demand for the stock and the conditions of the business that issues it.

With gold, it is immune from being exposed to risks involving deteriorating fundamentals, both internal and external ones, so the only thing that really drives its price is the demand for it itself. From an investment perspective, this makes gold considerably more reliable long term than stocks.

With stocks we have to go on past performance only, which may or may not continue in a reliable way, but the long-term durability of gold is not only much more time tested, but has persisted and is expected to continue to persist in all conditions, over the long term anyway, in a way that is much more reliable than any other type of investment.

How Gold Has Performed as an Investment

While gold has a lot of durability as far as it being a long term investment, this does not mean that it is all that stable, and in fact it is quite unstable as far as investments go.

A lot of investors simply buy an investment rather blindly, with little or no regard to its trend. If gold is trending up, in a bull market, it can deliver some fantastic returns over a period of several years, where if it is in a downward trend, it can lose a lot of value as well.

If one seeks to play both sides of the investment, to go either long or short to ride with the trend, then the potential for capital gains can be significantly increased. These trends need not be short in duration, as they can be as long as 20 or 30 years. This is similar to cycles that we see with stocks, only gold offers the opportunity to seek out even longer cycles if one is in for the long run.

If we look at a chart of gold adjusted to inflation over the last 100 years for instance, we will readily see the completion of 6 distinct major trends, with our currently being in a 7th as the price of gold corrects from its 2011 all-time highs.

The great thing about charting gold is that the trends with it tend to be particularly distinct on monthly, inflation adjusted charts, which should make it easy for longer term investors to determine where they are in the long term cycle of gold.

We are taught by the investment industry to buy something and then just ignore its investment performance, or at the very least, bite our hands when we get the urge to seek to time an investment, but whenever we are looking to engage in any investment, it is always wise to monitor its performance and its trend and it is downright foolish to just turn a blind eye to all of this.

A Brief Walk Through History With the Price of Gold

If we go back about 100 years ago, gold was trading at around $470 an ounce, adjusted to inflation, and 100 years later, it is valued around $1280. If one held it throughout, one would have a tidy profit, net of inflation, but this return would pale what could have been achieved if one tracked the Dow, for instance.

So, gold is seen by many as having lesser potential for return over the long term, but this is true only if we buy and hold. If we seek to time gold investments though, there is the opportunity for much greater returns. This is true of stocks as well but gold offers a similar promise along with the advantages of gold being perhaps easier to time.

Our purchase of gold back in 1815 would have been at an inopportune time actually, as the gold market was in decline at the time, and 5 years later it lost half its value. During a decline, these days anyway, one can go short gold and profit that way, pretty easily actually, although many investors have a great deal of difficulty seeing short positions as investments in any sense.

We could instead view this as an investment in a security that gains value when gold goes up, such as inverse gold ETFs do, and this allows us to keep our biases toward the long side while still functioning as a short sale.

From there, over the next 14 years, and through the crash of 1929, gold rose from $243 to $644. Even If one had just bought after the crash, one would have more than doubled their investment over the next 5 years while those long the stock market got hammered.

From 1934 to 1971, we saw a long bear market for gold, seeing it decline down to $226. Being long gold during this time would have been a mistake and the declining charts told the tale here.

In 1971, after the U.S. got off the gold standard, things really shot up, and over the next 9 years, the price of gold rose nine fold, to over $2000 an ounce,  The next 20 years were a rough time for gold though, seeing it go down all the way to $368.

The next 10 years were very good to be long gold, as its price went virtually straight up to break $1900 again. Since then, over the last few years, we have begun another bear market where we have seen it drop to below $1200 in 2015, where it has since stabilized.

Gold Investing Is Therefore Really About Timing

Whether one is willing to go short gold or just wants to be long, it is important indeed to be long gold during times where the price is going up over the longer term and either short or at least not being long when it is trending down longer term.

One can still set a time frame of several years, as investors do, and still be aware of overall market conditions and trends and look to craft one’s investment strategy in accordance.

There are other reasons to own gold or to speculate on its price, but if we are indeed looking to speculate on the future price of gold, it is wise indeed to look to where the price is heading if one seeks to make a profit here.

Even long-term speculation involves taking advantage of probabilities, and it’s always a matter of looking to assess what the probabilities are of the investment succeeding in order to even decide whether an investment, such as investing in gold, is worthwhile compared to other ways to use our money, or is even a good idea period, if we are looking to profit and not lose.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: [email protected]

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