Gold is a Misunderstood Metal – Don’t make the Mistake of Ignoring it
Gold is a Misunderstood Metal – Don’t make the Mistake of Ignoring it from Commodity Trade Mantra
Gold was once a common form of payment around the developed world, but after World War II the precious metal’s influence began to wane. In 1971, when the United States finally put an end to the gold standard, the role of the yellow metal changed for good. But that doesn’t mean gold is just an antiquated relic or a bad investment; you need to get past such myths about gold to understand its place in the world, and, perhaps, your portfolio. Here are five myths about gold debunked.
1. There’s a firm answer to whether gold is or isn’t money
There’s no point in trying to prove that gold is money, or that it isn’t. Because, in many ways, the answer is yes — to both. Roughly 9% of the demand for gold in 2016 came from central banks and other financial institutions. Gold bars and gold coins, meanwhile, accounted for another 24% or so of total demand. So roughly a third of gold demand in 2016 came from consumers looking at money-like uses for gold. American Eagles, interestingly enough, are stamped with “face values” that range from $5 to $50.
That said, around 47% of gold demand in 2016 came from jewelry. That’s a huge percentage, and clearly not related to money in any way. Buying a fancy gold necklace might be a way to show how wealthy you are, but you certainly aren’t doing it with the intention of using the necklace as a form of currency. The rest of the demand for gold comes from things like dentistry and technology, which are even further estranged from money.
The real answer here, however, is that it doesn’t matter. You clearly can’t walk into your local grocery store and plunk down gold bullion to pay your bill, or at least I don’t recommend it. Even though American Eagles have a “face value,” they are considered collectibles and are worth far more than the dollar figure stamped on them. At the same time, you can easily exchange gold for dollars. Even a gold necklace can be sold fairly quickly (for the value of the gold at least, if not the full value you paid for it). So gold is more than a collectible, but maybe a little less than a currency.
2. You shouldn’t own physical gold
If gold is only kind of money, why bother owning physical gold at all? The truth is, owning gold can be a real pain in the neck. For example, if you buy a gold coin you’ll likely pay a markup over the value of the metal contained in the coin. If you buy direct from the U.S. Mint the markup helps to pay for the stamping of the coin. If you buy from a dealer, the markup is the dealer’s commission.
Once you have the gold, meanwhile, you have to do something with it. You could stuff it in a drawer, but that seems like a bad call for something that could be worth hundred or thousands of dollars. That might mean you buy a safe or put the coin in a bank safe deposit box. Either way, you are now paying for the privilege of owning the gold you bought. So far, owning physical gold sounds like a bad proposition — unless, of course, something really bad happens.
No, I’m not suggesting the zombie apocalypse, though recent research suggests that around 5% of Americans do actually fear such a thing. But it’s not unrealistic to suggest that a war or other event could materially disrupt the world’s financial systems. War, for instance, is feared by nearly 50% of Americans, while a financial collapse worries about 45% of us. In either case, if fiat currencies like the dollar became worthless, your gold coin would suddenly have a lot more functional value — anywhere in the world.
It doesn’t make sense to have all of your wealth in gold, but it’s probably not a bad idea to consider owning some physical gold or silver. Just in case.
3. Gold is an awful investment
Gold bugs love it (I wonder how many gold bugs believe in zombies?), and others hate it. The problem with gold as an investment, of course, is that it’s a commodity subject to often volatile and extreme price swings. But there’s a limited supply of the metal, and, as noted above, it can be easily exchanged for cash. That makes it a physical store of wealth with a price driven by investor sentiment. Many people attempt to time the ups and downs of gold. Only in this case, fear will usually drive the price of this precious metal higher.