Tuesday, September 28, 2010

Gold bubble?

How do you feel about the runaway gold prices over the last few years?

I've been skeptical about it from the beginning, and I'll tell you why: gold is not a hedge against inflation. Historically it has been, but there's no guarantee that it will continue to be a safe investment in that regard.

Gold has little practical value. It's not widely used in industry. We don't need it to live.

It has been ingrained in us since we were children that gold is precious and valuable, but why? What good does gold do for you? Does it increase your quality of life, or is it just something that we covet because the previous generations told us to?

We pay top dollar for gold because it's rare, right? Think about this: gold is recyclable. It can be melted down and re-purposed. Much of the gold available today has been recycled. The jewelery shops and smelters are making money hand-over-fist on gold they've already sold before. When you die, your heirs will pawn or sell it back to them, and they'll melt it down into the fashionable style of the time and sell it again.

And here's my ultimate point: gold has little industrial value. Yes, it's used in small amounts in a few industries, but despite the rarity, we're not going to run out of gold any time soon. Gold is only valuable because we like it and because we're convinced that we have to pay handsomely for it.

The gold bubble is going to burst. It is not an emergency form of currency because it has zero survival value. If the zombie apocalypse happened tomorrow, what reason do I have to give you a gun and some food for your shiny ring? Much like the housing bubble, it's only worth what people are willing to pay for it, and I have a feeling that people will wise up and realize they have better places to put their money.

If you're looking to invest in gold, take the safer route: invest in the mining companies. They stand to make the most money on the current prices, and it'll be easier to get out of your stock position when gold prices come crashing down.

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