Is gold really a safe investment?

With inflation rampant, investors are constantly being advised to buy precious metals, increasingly silver, but gold retains its ancient fascination. Is this really such a good idea for the ordinary person?

Although the phrase as good as gold dates only from the 19th Century, the sentiment is much older. At one time gold, and other, less precious metals, were the only practical currency for most people.

When there is rampant inflation, investors hoard gold in accord with Gresham’s Law - bad money drives out good. This can and does lead to some people making a killing; in times of austerity, they can buy up property and other assets at bargain basement rates. It is also true that because of its scarcity, gold has always held or even increased its value over the medium to long term. This has led to calls for the reintroduction of the gold standard, which hard money advocates like American Congressman Ron Paul and other Libertarians believe will solve all America’s economic problems, and perhaps the world’s. Some even call for the total revocation of paper money and credit, but is this practical, and is fiat money the real problem?

At the time of writing, gold is $1,591 per ounce, almost £1,000. Because of this, it is impractical for most people to use for everyday transactions. How does one buy a cup of coffee, a full English breakfast, or even a week’s supply of groceries with gold?

For most of us, gold is owned primarily in the form of jewellery, though because it is a very soft metal, pure gold is seldom used, so employing gold jewellery as a form of currency is not a good idea. There is also a very large mark up on gold, and on top of that, the magazine Which? and other consumers’ organisations have on occasion demonstrated that anyone selling gold jewellery needs to keep her wits about her. It is too easy to be shortchanged or even badly ripped off.

Also, the value of gold, its high visibility, and its easy conversion, make it an attractive target for outright thieves, including violent street robbers. In the West Midlands, over fifty women have been targeted in such robberies this month. Asian women in particular are soft targets because many of them wear gold jewellery for cultural/traditional reasons, and this gold is generally of higher quality. In one recent attack, two brave characters robbed a 57 year old woman; one held her shoulders, while the other snatched her necklace and earrings.

People who buy gold for investment purposes are better advised to purchase special gold coins or bullion. But where do they store it? Most people don’t keep safes in their houses, so hiding it under the mattress – or some such – is the only real alternative for those who take actual possession of the gold they buy. Can you buy gold and not take possession of it? Sure you can, this is how the modern banking system started. The problem though is, how do you know the gold you bought actually exists, or that it belongs to you and only you? One of the latest – and more plausible – conspiracy theories about the current mess the world is in concerns Fort Knox, where America keeps its gold. Some people believe most or all of this gold has been sold to foreigners, or that it is not actually there anymore, physically.

If that is indeed the case, then America is bankrupt, and may have been for years, which begs the question, how does it keep running? The answer to that is simple; the value of money is purely psychological, it functions as long as people believe in it. Its real value is derived from the goods and services the community creates, not from sitting in a vault, or even from the note and coin issue.

There is nothing wrong with fiat money, indeed its use has enabled the world’s economies to grow at an unprecedented pace, but money must be issued by governments debt-free and in amounts commensurate with the real wealth behind it, not as a debt subject to repayment at interest in perpetuity by private corporations.

One other thing, what about E-Gold? Forget about it – it’s a scam! If your account is hacked and you get ripped off, you won’t get it back, and indeed the company will ensure you won’t even be able to identify the thief.

[The above op-ed was first published July 15, 2011. The associated image (of gold bars) has been omitted. The original title of the article was Is gold really a safe investment? — not for Asian women; it appears to have been renamed the same day.]

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