Should I invest in gold?

I like gold

At times of economic and uncertainty the gold rush seems to commence. All of a sudden everyone seems to be talking about gold:

Should you buy gold? Sell your gold? Buy your gold? Bullish on gold. Buy mining Companies. Buy gold ETFs. Buy gold bullion. 

Whenever there is a crisis gold always seems to be on the up.

So why all the fuss over gold?

Traditionally, gold is seen as a safe haven for wealth during times of economic crisis. Money has to flow somewhere and gold is seen as an asset that holds it's value over time. If you were to ask why it is that gold is seen as a safe haven it would be hard for anyone to fully explain why. It may be partly because gold is seen as a tangible object that has had value to the global population for millennia. 

Furthermore, traditionally most global currencies are backed in part by real reserves of gold held by the national bank. With the advent of gold exchange traded funds (ETF), the ability to track the gold market is easier than ever. 

Gold prices are thought to be independent of the economic situation (or at least not positively correlated). The reason being that gold doesn't have an intrinsic value based on normal valuation metrics. It doesn't have an income so it's value cannot be simply calculated as the sum discounted cash flows. Future cash flows and the discount rates normally used in valuation techniques vary based on economic conditions. Gold doesn't produce an income so isn't directly affected by the economy, hence what makes it attractive in times of economic uncertainty.

Lack on income

Unlike shares that produce a dividend income and investment property that produces a rental income, the lack of income from gold may be a problem. A good investment is when the current price of the asset is less than the discounted future income produced. Consider that when assessing the value of a business to buy you value based on what it will earn you in the foreseeable future. With gold this is not possible so what is its value. 

Gold's value is really due to raw supply and demand. It's price is whatever some other schmuk is willing to buy it off you for. This is what leads me to consider that it is risky. If you trade gold I'm sure there are times when you will make money. However, it relies on there being someone else who thinks someone else things it could be worth more than it currently is...and so on and so forth. Who is to say that you're not the person at the end of the line of trades who thinks that someone else will pay more, when in reality there is no one?

Portfolio approach

Personally, I would steer clear of gold, even in times of economic uncertainty. There are no fundamentals that can be assessed by an individual as with any other asset type.

If you insist on investing in gold then I suggest you use a small percentage of your capital to do so - no more than ten percent. However, I'd ask you to consider what are your fundamental value based reasons for doing so? How do you know that gold is over or under valued?

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