What is the purpose of investing in physical gold or gold ETFs?
If the US was taken off the gold standard and no one was to own gold at that time, what is the purpose of buying physical or gold ETFs today?
Any time the government gets involved they lessen or devalue things due to lack of inadequate management. So they control the currency & printing press through the Federal Reserve. Since the Federal Reserve was set in motion in 1917, gold was $20/ounce. That is why they called it a $20 gold piece. But that $20 gold peice could buy a 3 piece, handmade Italian suit and so could the $20. Today, that same $20 will barely buy you the silk hanky but the ounce of gold will still buy you the Italian suit.
This example illustrates the slow, gradually erosion of our purchasing power. Why? Simple supply & demand. The more dollars they print, the less each dollar is worth. Inflation, by definition, is sole a Monetary Policy problem cause by excess printing of money. It is not a short term shortage, drought, etc.. which can cause prices to spike and feel like inflation to you, but is really a supply demand imbalance.
BTW, did you know that the Federal Reserve is not actually owned by or a government organization. It is really owned by the member banks (the largest banks in the country). They purposely names it "Federal" so citizens would think it was a government enitity. The Federal Reserve was actually created for exactly 2008. To bail out the member banks if they ever got into trouble. This is well documented & wrong.
All that aside, that is why you should buy gold. As a hedge to the devaluation of our currency. As to whether you should buy physical or paper gold, that is another topic & too long to go into here. I will say that you should own some amounts, say 5%, in physical as a hedge to paper assets. Then you should hope it languishes because if it goes through the roof like some Black Helicopter theorist predict, we have bigger problems.
But it is a good asset class for everyone's porfolio & is non-correlated at the times when you need it.
Hope this helps and best of luck, Dan Stewart CFA®
The argument made for investing in gold has to do with it being a safe-haven when markets are in calamity. During the last financial crisis, gold prices soared on the belief that the capital markets could possibly seize given insolvency. The Federal Reserve’s quantitative easing and the TARP legislation from Congress ultimately allowed global markets to circumvent this problem, but gold ended up being one of the best investments during the 2007-2009 time period.
With that said, there is no robust historical evidence that gold is a good investment outside of this very specific time period. Over the last 40 years it has not even kept up with general inflation although prices have been extremely volatile. In other words, it is a very bumpy ride for a gold investor who ended up losing money in real terms. This is exactly what we would expect with any type of precious metal or commodity. Since it does not produce a profit, like corporations do, its only value is based on the supply and demand of the market. It is speculative by nature. Any sort of speculative investment has a 0% expected return.
Some advisors suggest a 5-10% allocation to gold in a portfolio for diversification, but if gold’s value does in fact manifest itself during times of financial calamity, then a 5-10% allocation in a portfolio is going to do little to protect you.
A much better solution is to stick with a globally diversified portfolio of stocks and bonds by utilizing lower cost index funds and buying, holding, and rebalancing.
Gold is often bought for diversification and hedging purposes. Historically it has very low correlation to stocks and bonds. I usually recommend no more than 10% to be held in Gold ETFs.
Few limited number of retail investors buy physical gold due to issues with storage and transportation. You can still do it but quite frankly you will need a place to safeguard it.
A large portion of the professional investment community views gold as "real" money because it cannot be printed (and manipulated) like paper money that has no inherent tangible value. Gold is commonly viewed as money amongst the general population of many Asian countries and countries with more recent experiences of monetary failure (e.g., Argentina). Here is my detailed take on the subject. Accordingly, gold tends to rise in price when the current monetary standard is perceived to be weakening or when investors are losing money by holding cash or conservative bonds on an inflation-adjusted basis (negative real interest rates). Many investors view gold as an insurance against very bad monetary outcomes (widespread debt defaults, deflationary spirals, severe inflation, etc.) and hold a portion of their portfolio in it (e.g., 5% to 10%). Some believe (or hope) that we may someday have a gold standard again because of all the ultimate faults of our paper money system. Keep in mind that every single paper currency that has ever been issued ultimately failed.