Investors around the globe hold their collective breaths as 2020 comes to a close. It’s a bizarre market with so many unique issues at play and one of those defining moments that potentially make-or-break fortunes for both individuals and organizations. For instance, as of November 16, 2020, gold is at $1,890.70 / oz, nearing that $2,000 milestone that many gold investors daydream about. Even outside that field, many people are wondering if it’s time to invest in gold.
Gold is nearing an all-time high, though its liquidated or spendable value is still a long way from its peak of $2,269 / oz in 1980. Adjusted for inflation, that would equal something like $7,170 today. Investments in gold mining and extraction are hot right now, too.
So today, we’ll consider gold as an investment. Yes, gold prices are high. But does that make it a bad investment in 2020? As investors, our mission is to buy low and sell high. The question becomes — is this gold’s highest point? Is it time to sell?
Or, is this only a stepping-point on a path to truly stellar prices?
I think the answer lies somewhere in between those ideas. And frankly, with the current appetite for consumer technology that relies on this precious metal, there will never be a bad time to invest in gold. As long as the internet exists, we will always need gold.
We’ll start with a brief history of gold as an investment, with a nod to the gold standard. We’ll talk about the implications and costs of gold transportation and storage. Then, we’ll consider some unique risks associated with it. Ultimately, remember that every investment opportunity — even gold — comes with a risk.
A Brief History of Gold as an Investment
Gold might be the most popular investment in human history. It’s recorded among the earliest civilizations as a status symbol and currency, and every economy on the planet recognizes it.
Per PhysicalGold.com, “Gold has been highly valued for its unique and attractive properties [since] 4000 BC. The oldest gold treasure in the world dates from 4,600 BC to 4,200 BC and was discovered at a Bulgarian burial site in Varna.” The first gold coins used for currency were minted 2,500 years ago by Darius and are available to numismatists today.
Gold has shaped our global economy — as both a form of currency and a symbol of wealth. It’s the basis upon which our modern global economy stands today.
Why Gold Has Been a Sound Investment, Historically
Gold has many attributes that make it so valuable. It’s beautiful to behold. Also, pure (24k) gold doesn’t react to oxygen, so it doesn’t rust or tarnish. In the realm of commodities, it never goes bad. Unlike gasoline or corn or sugar, gold can sit in a vault for decades — even centuries — and never deteriorate. It won’t be adversely affected by an early frost or a wet summer, and it won’t be nibbled away by pests.
Gold is very soft as metals go. Sitting at 2.5 on Moh’s Hardness Scale, pure gold is about as soft as your fingernail. That means it’s perfect for jewelry and becomes wearable, portable wealth in an emergency. It’s also easily divided, which makes it ideal as a currency. That’s why so many nations once used gold as a basis for their currency valuations.
The Gold Standard
The gold standard is a monetary system based on the value of gold. Note that no modern currency operates this way today. However, some grassroots movements and very well-educated individuals would like to see the gold standard in action again. But I don’t see it happening any time soon.
How it works:
- A nation sets a fixed price for gold, based on gold owned by the government, and buys and sells gold at that price.
- That fixed price determines the value of that nation’s currency at 1/1000.
For instance, if the US had a stockpile of gold and set a gold price at $1,000 per ounce, one US dollar would be worth 1/1000th of an ounce of gold.
It sounds straightforward until you realize that all nations need to be honest about their gold inventory and play by the rules when valuing their currency. Do you trust Kim Jong-un to do that?
You can also run into risks like a huge, surprising swathe of gold being discovered — like the California Gold Rush of 1849. Geology has come a long way since then. We imagine most geologists looking to hit it rich are employed in the gold mining and prospecting business (after the oil and gas industries). All those brilliant minds, all that top-notch tech — suddenly, the gold standard isn’t so appealing, and it might seem like now isn’t the right time to invest in gold.
However, we must address it. The notion that the gold standard could re-emerge in the event of a global crisis is an excellent mental exercise for gold investors. As 2020 has been so quick to teach us, it could happen.
What Moves the Gold Market Today?
Gold is one of the top commodity markets, ranking only behind crude oil in an ordinary year. But interestingly, the price action of gold doesn’t reflect the traditional supply and demand laws we learned about in Economics 101.
Usually, inventory levels and demand determine the price of commodities. When inventories are low and demand is high, prices jump. We see it all the time, and 2020 has been a masterclass in supply and demand’s economic concepts.
Gold prices, though, consider interest rates and currency fluctuations — particularly relating to the US dollar. It’s an inverse relationship: when the US dollar goes down along with interest rates, gold rallies.
Gold Is a Safe-Haven Investment
Vicky McKelvey of CNBC says gold is a good hedge against the risk of inflation because the rising cost of goods and services tends to erode the US dollar value.
But is now a good time to invest in gold? If that Nigerian Prince who used to email you were a real person and dropped a few million dollars in your lap, gold would be an ideal investment. It will always have an intrinsic value. Like other non-renewable resources, the earth’s known supply has a limit. Right now, we have enough. Gold isn’t terribly rare — yet. But, barring any significant geological finds or advances in tech manufacturing, the gold price will be unimaginably high someday.
And while we cannot guarantee how it will go in immediate years, gold might be a good place to rest college education funds or retirement money if you’re young. If you’re looking at a long-term horizon, you can make the argument that now is the time to invest in gold. Furthermore, if the US and other nations continue to print more money to “stimulate” economies after COVID-19, we can expect significant inflation — making gold even more attractive.
However, gold needs to be stored securely. You won’t sleep well with $1,000,000 of gold bullion in bags under your bed like Smaug the Dragon, and no homeowners insurance policy will cover it in case of a loss.
Also, you might be surprised to find there is no way to hide a real stockpile if the government were ever to come knocking.
Can the US Government Seize Gold?
We don’t use the gold standard anymore, so the idea that the government would seize your gold stockpile seems irrelevant for many US investors. But it has happened before and could happen again.
In 1933, President Roosevelt created the Emergency Banking Act. Aside from any personal jewelry items, those who owned gold were required to turn it in at approved banks. Times were tough back then, and gold hoarding made the US economy stall further. (The order was also meant to help the Fed increase the money supply during the Great Depression. The Federal Reserve Act of 1913 required the Fed to have 40% gold backing the notes it issued.)
2020 has brought investors significant and unforeseen economic upheavals. And the US dollar has been declining in recent years. Its status as the reserve currency of the world might be questionable. We aren’t here to pitch politics, but know that fiat currencies (those not based on a gold standard) do fail. Over a long enough time, all paper currencies lose their purchasing power. That’s why cryptocurrencies are so appealing to investors (and that’s a blog for another day.)
If a genuine global crisis were to strike — we’re talking about nuclear war, not a pandemic — one can imagine governments seizing large amounts of gold. Add that into your calculations about the right time to invest in gold.
Is Today a Good Time to Invest in Gold?
Gold’s intrinsic value makes it more of a currency than a commodity. However, gold prices can be driven by sentiment rather than traditional fundamentals. The COVID-19 pandemic has shattered consumer confidence, but the holiday shopping season is here. A surreal cross of holiday shopping and panic buying is leaving US retail shelves empty again. Therefore, an uneasy consumer population is more interested in gold than in an ordinary year.
However, between its future value in technology, the fact that it’s a finite resource, and the onward march of inflation, someday decades from now, gold will be incredibly valuable. No matter how you slice it! So it’s an ideal time to invest in gold for organizations and governments looking that far down the road. But let me know if you disagree.
If you’re sitting on some gold and would rather have liquid assets, then yes, sell it. At $1,800 an ounce, you can sell the gold that you almost surely purchased for much less. If you don’t need that cash today — hang on. I believe we’ve only seen the beginning of what gold can do.