Does Investing In Gold Make Sense?

The Toi Gold BarThe World’s largest gold bar is on display in Japan at the Toi Gold Museum . It was manufactured by the Mitsubishi Materials Corporation, and went on display at the museum in 2005. The Toi Gold Bar weighs a massive 250kg, or some 8037.686 troy ounces. At today’s current spot price of $1610.30 USD per troy ounce, the Toi Gold Bar is worth some $12.9 million dollars (USD). That is one massive currency hedge!

The standard gold bar held and traded internationally by central banks and bullion dealers is the Good Delivery bar with a 400 oz. nominal weight (from Wikipedia). Its current value at $1610 USD per troy ounce is $644,000 dollars (USD). When countries store gold reserves, they are using the 400 oz. Bar.

For individual investors, gold producers also forge 1kg gold bars, the equivalent of 32.15074656 troy ounces. At today’s post price of $1610 USD per troy ounce, a 1kg gold bar is valued at $51,772 dollars (USD). Gold bars are also available in 500 and 100 gram denominations. For the average investor buying large gold bars really doesn’t make much sense. Alternatives such as precious metals funds, gold bullion ETFs, and single troy ounce gold coins, make investing in gold much more practical.

Is Gold A Good Investment?

When times are uncertain, it’s no surprise to see the Gold Bugs making a comeback. Many investors do not consider gold bullion as a suitable investment, especially as it does not produce income. However since the Financial Crisis of 2008 and 2009, and continuing global economic instability, the price of gold has been increasing in price and held its ground. I’ve been one of those investors who haven’t jumped on the gold bullion wave, but looking back I sure wish I did!

Back in July 1999 gold was trading around $256 USD per troy ounce. By September 2011, gold had reached a peak of $1892 USD per troy ounce, a 640% increase in 12 years, or 53% average annual return. Today, gold is valued at $1613 USD per troy ounce. For the ten year period ending June 2012, gold has increased from $325 to $1613 per troy ounce, an increase of $1288 dollars (USD) or 396% return. Although gold does not pay you any dividends or interest, simply holding the metal over the last 10 years would have netted you a 39% average annual return.  A ten year chart of gold tells the whole story.

Is it Too Late to Jump Onboard?

It’s easy to look back in the rear view mirror. Although gold has been a great investment over the last decade, there is no guarantee it will continue to be. During strong bull markets, gold tends to lose its lustre, and usually makes its comeback during market downturns and uncertain economic times.

Those uncertain economic times look poised to continue, as G7 nations deal with massive deficits. In Europe countries such as Ireland, Greece, and Spain have teetered on the verge of default, yet they have been bailed out by wealthier nations. Europe and the G7 countries continue to pass the “hot potato” of debt from one nation to the next, print more money, or issue new sovereign bonds to band-aid the problem. But as David Trahair pointed out in his recent book Crushing Debt, it is unlikely that the government and sovereign debt will ever be repaid.

In light of this economic uncertainty, gold may hold its value, and it could well be a hedge if there actually is a sovereign default. Will gold soar to new highs as it has over the last decade?  That really is the million dollar question. ;)

This post was written on behalf of Gold Made Simple, and is not intended as an endorsement or recommendation to buy gold, and is provided for educational and entertainment purposes only.

7 Responses to “Does Investing In Gold Make Sense?”

  1. Poor Student

    Jun 13. 2012

    You can’t argue with numbers but I do not see gold as a reasonable investment. It has few industrial purposes, so it’s main and almost sole function is decorative.

    I forget what the value was but I read that if you had all the gold in the world it would make a cube that takes up Wrigley Field. And with the money it would take to buy the cube you could buy all the agricultural fields in the US, plus the largest oil companies and Coca-Cola many times over. Why would you buy a giant cube when you could buy things that will feed people or businesses that make money.

    Sooner or later I think people need to realize that gold is only worth anything because we say it is (tulips anyone?). I prefer businesses that hep people in one way or another.

    That is how I rationalize it when gold increases ten fold in the next two years and I miss the boat anyway.

    • The Dividend Ninja

      Jun 13. 2012

      Poor Student, I’ve already missed the boat on gold bullion as well, and I don’t plan to be on the next boat or “tulip” bubble with you either. ;)

      However gold is far more than decoration, and it has been for thousands of years since ancient times. Even the earliest cultures placed value on gold far an above its aesthetic value.It has always been sought after and will likely always will be.

      Countries around the world stockpile gold bars to to protect their currencies and economies. People “invest” in gold becuaes they believe it will be worth more at a future date. Nations will rise and fall, currencies will come and go, but gold will always be sought after – for centuries to come. Of course you and I won’t be around to see if that’s true or not. ;)

      Cheers

  2. Andrew Hallam

    Jun 13. 2012

    The recent returns have been great for gold, but I think it had more laypeople buying above $1,600 than it did when it traded below $300 per ounce just a few years back. For some reason, we like buying things that have recently become more expensive. I have a friend named Steve who’s the world’s worst investor (at least, I nominate him!). He bought gold at $1,800 because it was such a great performer; he bought tech stocks (for his entire portfolio) in the late 90s, no bonds. He bought U.S. real estate at its peak in 2005. And now, he’s disappointed with gold. Poor guy, quite literally.

    • The Dividend Ninja

      Jun 13. 2012

      Andrew, thanx for dropping by! Excellent comment, so well said… “we like buying things that have recently become more expensive”

      Cheers

  3. Let's Learn Finance

    Jun 15. 2012

    I agree with Poor Student above, he pretty much said what I was going to. The only reason gold is valued as it is because of its derived value – intrinsically; it’s worthless. You can’t make something out of it (well you can, but what you make is only valuable because we derive that value; like a gold ring.) nor can you make real utility gains.

    However, the great aspect of this is that the value of gold is derived from a human mindset that probably will never, ever elude us: It shines and doesn’t rust = makes a great wedding ring and my friends will be impressed.

    It’s a cycle of “its valuable because I think its valuable” that keeps feeding itself, so in my opinion people will have to lose faith (if we haven’t done so already?) in the value of fiat money and give up on the whole system of trading useless paper before we give up on the value of precious metals like gold.

    I think it’s a sold investment, perhaps not the highest return compared to other opportunities but then again return is proportional to the risks you have to take. ;)

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