November 8, 2009

Fool's gold

Gold is at an all time high - which means that several people are trading their dollars for gold because of their fear of the dollar potentially becoming less valuable due to inflation.  The more people that invest (demand) in gold drives its price higher... and when demand increases for gold, then the supply increases, which drives the price of gold downward.  I think people are fooled into believing that gold is an actual good investment, when it is clearly not.  If you do your research, one can see that gold and inflation moves hand in hand - which means that those who invests in gold would not make any profit from it if held long-term.  Investing in gold will give you an average return of about 4% YTD - but inflation is also about 4% YTD!  So your net profit is zero.

Obviously, people invest in gold not because of profit - but for stability.  The benefit of investing in gold is because your loss of value is zero!  If the value of the dollar declines due to inflation and you're investing in gold, then your portfolio value does not decline at all since the price of gold will most likely go up as the dollar declines.  If you're going to invest for gold, then it should be for the short term only - since it does not make sense to hold on to gold for the long term.  If I owned gold today, I would be selling today at its highest point...because sooner or later the price will come back down.  But that's just me - short term investing is just like gambling, and I don't like to gamble with my money...I like sure things.

The Bottom Line: 

If you hold on to gold for the long term - you will actually lose money.  Because long term investing in gold yields no profit (+4% return - 4% inflation = 0% ) and once you pay Uncle Sam's capital gains tax (currently at 15%) you have just paid taxes for an investment that gives you a 0% return.