Gold Investments – Golden Opportunities for Long Term Value?

Throughout history gold has been at the heart of international trade, treacherous wars, vies for political power, and of course, the jewelry industry. A precious commodity, Christopher Columbus crossed the Atlantic in 1492 because of rumored "Cities of Gold" that he intended to conquer in the New World. He believed that literally, there were entire cities built of gold. During the California Gold Rush, over 300,000 "forty-niners", or pioneer men, women and children, crossed the rugged United States in less than favorable conditions in order to reap the land of the rumored superfluous gold stores on the west coast. Yet despite the famed notoriety of this precious metal, the answer to the inevitable question: "is gold really a good investment?" is surprisingly negative. Put simply, and despite recent increases in the value of gold, the answer is NO.
First, while gold may be a precious metal that is currently "doing well" in the international market, one must look at the long term potential of gold investments. What do economists mean when they report a strengthening of gold's value over the past year? For us non-economist minded types, this essentially refers to the fact that the price per ounce for this precious metal has soared to record highs: On November 18, 2009, the price of gold reached a historic high, at 1,150.52 dollars per ounce. Typically, a long-term investment would be one that consistently, albeit slowly, gains momentum. Gold, unfortunately, has no such track record. The average rate of return tracked as far back as history allows is slightly better than 2%; and in recent years, the rate of return has been a little better, at 4.4% and only just somewhat better than inflation.

Secondly, one should examine the short-term potential of gold investments. Typically, investment rules guide us to "buy low and sell high". Since gold is especially strong these days, perhaps the strongest we have seen in history, the economic sages would warn us about investing in this precious metal commodity. High today, low tomorrow. Historically, we're familiar with these swings. Gold, like any other commodity, is a factor of supply and demand. Supply has risen since, among many other reasons, entities that have lost other assets have chosen to sell off their gold. Other factors that affect the supply and demand of gold include wars and times of crisis, bank failures, and interests unmatched to inflation. These are factors over which the average citizen, who might be tempted to invest in gold and precious metals, has no control.

Finally, when assessing an investment, liquidity should be considered. Unlike other "safe" investments such as bonds, CDs, specific stocks and certain real-estate, gold investments can't be liquidated to pay a mortgage or your daughter's college tuition. Liquidity is a notion that so many of us have forgotten about in this age of comfort, yet it is a very real consideration in times of crisis. Furthermore, while many firms are in the business of selling gold, very few will actually buy it back for market price.

While the temptation to make gold investments today is high, one should be wary of investing in this precious metal commodity. Yes, its value is currently strong, yes, it's been pretty stable over the course of history, and yes, gold certainly is gorgeous. But assess both the short and long term potential of gold investments against other goods and commodities, and the comparison speaks for itself. In short, instead of making gold investments, stick to wearing gold jewelry