Here’s some advice that nobody really wants to hear: when it comes to investing, there are no sure things.
That doesn’t mean you should be paranoid to the point of inaction. I recently saw someone complain on social media that he had read about the impending collapse of the global economy for so many years, he’d stayed away from the stock market while his friends made nice returns investing in equities.
But it does mean there are no surefire formulas or certain bets.
Gold is a nice example because its most enthusiastic cheerleaders sometimes talk as if the precious metal has magical properties. There are plenty of reasons why gold has historically served well as money, including that it’s pretty and shiny (these are not insignificant economic factors), it’s scarce, it’s durable and does not corrode, and it’s malleable.
But what intrinsic value does gold actually have? In the 21st century, what really is the value of a stable but not terribly useful element? In the event of a zombie apocalypse or something even more dramatic, such as the collapse of the S&P 500, it’s not obvious that we’ll revert to exchanging gold ingots.
Of course, there are also serious technical discussions about, for example, the effects on inflation of decoupling currencies from the gold standard. The internet being the internet, though, you’re just as likely to come across arguments about how storing gold bars under your mattress is the only way to escape government mind control.
The pragmatic case for gold
But if gold isn’t magic, it is a popular investment vehicle. It tends to be a good store of value, and is considered a relatively stable commodity in times of crisis.
That makes gold a potentially good source of returns in politically unstable times and a useful hedge against share price losses.
However, it is important to appreciate that history does not show an inverse correlation between gold and equities. In other words, it is not the case that whenever share prices have gone up the gold price has gone down, or vice versa.
Professional traders take into account a huge range of data when making investment decisions, and even they can get it wrong.
For the rest of us, the lesson isn’t very exciting, but it is important: diversify your investments, appreciate the risks involved in seeking higher returns, and don’t assume you can protect yourself from one risky investment by making a different kind of risky investment at the same time.