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Gold, What is it Good For?

So gold… in the investment world this is a touchy subject, there are people called “Gold Bugs” who love gold, they call it the only real money. There are many others that hate it, saying it isn’t a real investment. As with all things both sides have some interesting and valid point. But the real question is, should you have some gold as part of your personal financial plan?

Here is how I look at Gold and why I think it might have a small place in people’s financials lives. Despite popular belief, all money is just make believe. The Government is able to issue dollars as they see fit, it’s a made up unit of account that we all agree to use. Gold is very similar. There is no real reason why people think of it as “real” money other than it has been used and assigned value for a long time. Sure Gold has some properties that make it useful as money, it’s scarce, it doesn’t decay, it’s easily identifiable, it’s very dividable. But in the end it’s just a metal. It is not particularly useful other than looking pretty and in people’s belief that it’s worth something. That being said, it is outside the control of governments and universally valued. What are the implications of that?

Because it is outside the control of any particular government, it provides a protection against inflation. Governments can’t just make new gold if they wanted to buy stuff like other governments can with their currencies. So if you are in a country where the currency goes down the tubes like so many have experienced, having gold means you know it’s still worth what it was before. It keeps it’s value. Also it is relatively portable, meaning if you are in one of those countries you might be able to leave with some of your wealth intact and start over more easily someplace else (check out “When Money Dies” by Adam Fergusson for a real world example). Because of this, when the world starts to look like a scarier place, gold will sometimes go up in value due people wanting some emergency protection, as we saw a couple years ago.

In the end, having a little gold, whether physical or in a security form like GLD, isn’t a terrible idea. It really depends on your view of the future. If you have a very negative view, then more gold seems prudent. If you have a positive view then you’d want less. Gold is an option on something disastrous happening, it’s a kind of insurance policy and less of an investment. To put it in perspective, gold should not be something you’re buying before you even have emergency savings :).

What have your thoughts been on gold? Did you think of it as an investment, or something else?

As a side note, cryptocurrencies (despite being “nothing”) actually perform very similar functions (and many others) that gold does, but in some ways are vastly superior and some ways less so. But that’s a subject for another post.

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