Gold has been making headlines lately for its plummeting value. What does that mean for us?
The answer is not much. Most individual investors don’t own gold beyond what’s found in their jewelry box.
Gold is what’s known as a “fear trade.” Its price climbs when investors lose confidence in the traditional stock market. This is particularly evident when we look at historical gold prices. Gold hit an all time high of $1,900 an ounce during the market turmoil that followed a downgrade to the U.S. government’s credit rating in September of 2011. As a general trend, when the market falters, gold shines bright.
The good news is that I believe that the falling price of gold means that people are gaining confidence in the stock market. Gold is seen as a safe investment when the markets are not doing well—it’s a hedge against a declining stock market and inflation. Gold’s recent slump could mean rising stock prices.
Do you think gold is a good investment?
I do not believe gold is ever a safe investment because you can’t time when it is going to do well. For example, from March 1987 through May 2005, gold returned 0%—yes, ZERO for nearly two decades. Over that same period, the S&P 500 boasted an annualized return of over 10%.
Of course, there are other periods when gold has far outperformed the market, but it’s virtually impossible to guess when that will happen. Over the long-term, I think the stock market is a much safer and more practical investment. For one thing, shares of stock represent actual businesses that are creating value—be it products or services—whereas gold is just a hunk of metal that sits there. Unlike a business, gold won’t pay interest or dividends, and it won’t grow earnings. Even as a metal it doesn’t add much value—it’s primarily decorative, with 52% of its use in jewelry, 34% in investments and 12% industrial.
However, I love gold; I’m just wary of investing in something where the value is entirely subjective…the only way to make money from it is to convince someone to buy it from you for more than what you paid (and spent on storing and insuring it).
Consider this: A man found a 17-pound lump of gold on his father’s North Carolina farm in 1799. It was the first documented discovery of gold in the United States. Want to know what that hunk of rock was doing before a local jeweler identified it? It was being used as a doorstop. For three years. At gold’s peak price of $1,900 per ounce in 2011, that doorstop would have been worth over half a million dollars. But like it or lump it, when it comes down to it, if you disregard the arbitrary value we ascribe to it, we’re talking about a rock.
Well that raises an interesting question: How do you know if something’s real gold?
You know how real diamonds cut glass and that old trick about dragging pears across your teeth to see if they’re real? (Real pearls feel gritty while imitation pears are smooth.) Unfortunately, there’s not that easy of a test for gold. One simple way to rule out fake gold is a magnet…Gold is not magnetic, so if the item is attracted to the magnet, it’s not gold—or at least not 100%. Of course, this doesn’t mean you’re not in possession of some other non-magnetic metal that’s also NOT gold. You could try the bite test—real gold is very soft and will dent, but if you’re testing a piece of jewelry, it will end up with teeth marks in it. Green and black spots are also telltale signs of a fake—Gold is chemically inert, which is why it never rusts and doesn’t irritate the skin; So if that bracelet is turning your wrist green, it could be a lot of things, but solid gold’s not one of them. Your best bet is to ask a certified jeweler.
How about those “Cash for Gold” businesses that advertise on T.V.? Are those legit?
Yes and no. First of all, with the price of gold at such lows, this isn’t an ideal time to melt down granny’s necklaces. If you’re insistent about cashing out that gold, be sure to do your homework. An undercover study conducted by the Department of Consumer Affairs in late 2011 found 74% of gold buyers in violation of state and federal laws. 74%! If you want to go the mail-in route, look for three things:
1. Insurance. Will your gold items arrive fully insured and protected in case something happens in transit?
2. References. What is the Better Business Bureau rating of the company? A company with a low rating should be avoided.
3. Guarantee. If you’re not happy with the cash value the company offers, can you get your items back, and if so, how long do you have to decide?
My advice would be to bring your jewelry to a local, reputable jeweler and ask for an appraisal. And sleep on it before you sell, because you can’t put a price on sentimentality.