Gold Rush

With the market still off its high mark, advertisements for gold have flourished. Is it a good idea to buy?


Well, gold settled in around $400 an ounce in 1982 and 1983. If you purchased in 1980, you would have lost 50% of your investment in just two years. This loss isn't as dramatic as the total lack of movement over the next twenty years. Most of 1998 saw gold prices in $300 range. In fact, gold prices do not remain over $400 ounce until 2006. Even the small recession after September 11th did not drive gold prices to new highs. So, if you had bought gold in 1982 and held it for 24 years, your investment would have netted you zero profit. You would have actually lost money if you consider that $400 in 1982 bought a heck of a lot more stuff than $400 today.

The reality is that gold is a gamble, not an investment. Every peak in gold prices is due to an economic crisis, whether the one we suffer today or the one we suffered 30 years ago. If there is no crisis, most investors realize it makes more sense to put money into stocks and bonds. As a result, they sell their gold, dropping the price, and buy stocks and bonds (raising their prices).

Gold prices today are at an all-time high. Will they keep going up? Maybe. Gold prices are up almost 20% this year alone. But how much higher will they go? Could today be the record? Is it tomorrow? None of us know the answers and the bad part is there is no method for predicting it. At least with stocks, you can look at their profits, their business plans, their debts, their management and make conclusions about whether the company can do better in the future. With gold, it's a crap shoot. Will you roll a seven or a three?

Conclusion

Gold has a long history of monetary value, although its use as a money has all but disappeared. Since 1971, when the value of gold was allowed to float in the market place, its price has gyrated through numerous peaks and valleys. However, it is has spent most of the past 38 years in a plateau of $300 to $400 per ounce. Does that make the $1000 or more an ounce costs today a bargain or a rip-off? Frankly, no one knows, but I'd be leaning towards the latter. The reality is that buying gold is a gamble; you are gambling that you are smart enough to buy before the price tops out and even smarter to sell before it drops.

That places it in the same category as the craps table. Only at the craps table, the odds are fixed, the payoff ratios are known and you can buy insurance for a crap roll. Plus, the drinks are free. Given the history of gold values, I'd say if you want to invest $1000 in gold, you'd be better off taking the money to a casino. Your odds are just as good and you'll have a lot more fun.

Be safe.



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