Why Gold?

I invest all my money in global stocks. Some of my friends say I should invest in gold, but I don't understand why. Shares in companies produce dividends and businesses are constantly trying to increase earnings. On the other hand, gold has value only because it is a convenient element. Gold does not produce earnings. I don't understand then how gold can have any growing inherent value and because of that it wouldn't be a good investment.

 Is this right or should I be investing in gold?

When you invest in shares, and buy them in US dollars, you must realise that unless the shares rise in value by at least 5-8% per year, then you are going to make a loss due to inflation, please realise that CPI is an inaccurate measure.

Gold, experiences a rise in demand of more than 5% per year, while supply rises at just 1%. As more people become disillusioned with their currencies, they will increasingly invest in gold as a safe store of value, thereby jacking up demand even more. So yes, gold does produce earnings since demand rises faster than supply.

Might I add, that if you do decide to invest in gold, don't invest in any derivatives - buy the thing itself. There are more derivatives for gold than there is gold itself, so if there's a rush to redeem them, then we'll have something similar to a bank run. 

I am no expert, but my personal opinion is that an investment in gold is primarily a hedge against inflation and the devaluation of the dollar and the market, in general, rather than an investment where you look for a big gain (while that can happen, it doesn't strike me as the primary reason to invest in gold).  That is, if we had a stock-market crash, experienced hyperinflation, et cetera, gold wouldn't lose its value like many other investments.    

When you invest in shares, and buy them in US dollars, you must realise that unless the shares rise in value by at least 5-8% per year, then you are going to make a loss due to inflation, please realise that CPI is an inaccurate measure.

Gold, experiences a rise in demand of more than 5% per year, while supply rises at just 1%. As more people become disillusioned with their currencies, they will increasingly invest in gold as a safe store of value, thereby jacking up demand even more. So yes, gold does produce earnings since demand rises faster than supply.

Yeah, I see what you mean. Investing in shares means you share in the profits of the company. Investment in global stocks would be fine unless there is a worldwide depression or a collapse of civilization. (It's possible.) Most people who have shares reinvest dividends and through compounding over time this leads to the gradual rise of stock prices. This growth is driven by global capitalism, entrepreneurship, etc.

Gold, on the other hand, is different. Gold does nothing. Gold thrives on fear since, in the event of a collapse of civilization, gold is a de facto standard currency.

I'm not saying gold is not a good investment. Clearly recently gold prices have gone up more than the S&P500, but remember Mises says we shouldn't look at the empirics. We should look at the underlying fundamentals. The fear underlying the recent gold price rises may be fragile or unsustainable.

Also, for me, buying actual gold, as opposed to a Gold ETF, is just not practical. What am I going to do, bury bars of gold in my backyard?

Because stocks crash.

http://www.lewrockwell.com/north/north600.html 

 Here's what it says at http://www.lewrockwell.com/north/north600.html

"In the crack-up boom, gold serves as an insurance policy against a catastrophe. You can buy your way out of circumstances that bankrupt others. You preserve much of your lifestyle by selling off a widely sought-after asset: gold. But understand: this is not a way to get rich. It is a way not to become totally impoverished."

This article talks about a collapse of the monetary system Nazi Germany-style during which paper money becomes worthless and citizens fight for food.

The article says that gold is not a good investment but is a way to preserve wealth during these apocalyptic times.

Wouldn't it be better to simply buy land in the country, stockpile on food, guns, water, and so on? You can't eat gold.

Norak:

Wouldn't it be better to simply buy land in the country, stockpile on food, guns, water, and so on? You can't eat gold.

Possibly.  However, not everybody can buy land or grow their own vegetables.  Therefore, gold serves the rest of us who need to trade.  

 The gist of your enquiry makes me want to sort of play the Devil's Advocate here and ask a sneaky question:

Fred Furash:

Might I add, that if you do decide to invest in gold, don't invest in any derivatives - buy the thing itself. There are more derivatives for gold than there is gold itself, so if there's a rush to redeem them, then we'll have something similar to a bank run. 

Should a person keep the gold in his own house or out-source its storage??  I genuinely do not know the answer.  It may simply depend on where you live. 

[Consider people who own gold: When was the last time they actually saw their gold? How do they know their gold still actually exists???] 

 

 My point is that we are sort of trading faith in one industry (the "private" protection/storage of gold) for faith in a different industry (in this case, stocks or derivatives).  When we are stuck in our current State of affairs, I wonder if the right choice is obvious because several years ago, the government out-lawed the private ownership of gold and it currently does not seem to like the idea of a competing private currency.  

Charles Anthony:

 Possibly.  However, not everybody can buy land or grow their own vegetables.  Therefore, gold serves the rest of us who need to trade.

Tobacco would also be a good trading item. But unlike gold it has a shelf life.

Your good question has reminded me of the difference of investing and saving. I think gold is best as a principle of sound money and as a monetary system. Apart from its being money, gold is a commodity in itself.  Unless there is sudden demand for it, gold's value is modest. During financial crashes, demand for it may increase; so may its value as investment.  Thus it's useful to not forget time element in such a question of yours.

I am very glad to meet you. You are my teacher!  I am researching futures .And I think Gold will rise to the pole: 1650 by the end of 2008.Thank you very much!         This is my e-mail:   futugoog@126.com