I find it annoying, if not fraudulent. Whenever the economy slows down or even crashes, some people start suggesting to buy gold as crisis-proof investments and of course, there are other people, following this ill advice, loosing money even more.
I seriously suspect that there is a method behind this. A game, played by financial jugglers that revolves around scaring people, looking for security, into buying their reserves at inflated prices, by trumpeting around that the global market will collapse soon.
So, why is it not a good idea to buy gold in a crisis? Gold does not actually have a value of it's own, nothing has. Value is a property, we humans attribute to things to reflect our desire of owning that thing.
Unlike food which we need for survival, the value of gold is artificial. We mostly only want it because it is scarce and because we think that someone else might want to own it even more and would pay a higher price for it.
Gold does not work for you. You can own it, but unlike most stocks, it does not pay dividends while lying around in the vault. That is, if you buy shares of some company for $100, which pay an annual dividend of $5 and sell them again after 10 years for $100, you'll have made a profit of $50. Buy gold for $100, let it lie around for 10 years, before selling it again for $100 and you you'll have made a negative profit of -$50 in comparison to the previously mentioned stock.
The only way to make money with precious metals is through fluctuation of the market price. You buy at a low price and sell at a higher one. This is the exact reason, why buying gold in a recession is not a good idea. This is when everyone wants to have it. High demand results in high prices. A high price means, it becomes difficult to sell it again at an even higher price. If you happen to buy at a peak price, you are essentially stuck with your purchase and have one of two options:
- Keep your gold and hope for a future crisis with an even higher peak value. Your money will be bound till than and you'll make a loss for not being able to invest it in anything, that pays interest.
- Sell it right away, before the gold price reaches a low due to the economy recovering. This will cause you to loose money immediately, but at least your funds are not bound for an indefinite amount of time.
Either way, keep in mind that gold bars are not crisis-proof investments. They are a game of "old maid", which you'll be, if you hop on the bandwagon and start buying, when the demand goes up. The only reasonable time to buy gold as an investment is when the economy is booming.
So, the next time, someone is telling you to buy gold in crisis times to safeguard against loosing your money, simply decline and point them to this blog post.