There is only so much gold in the world. Wikipedia states all the gold in the world would fit into a 20.4 meter cube. There are many uses for gold: monetary exchange, investment, jewelry, electronics are the first that come to mind (but did you know medicine, food and drink have also used the metal)?
So little gold compared to so many people in the world. As an investment, price is set by supply and mostly by demand. And demand goes up when fear goes up. Fear … an irrational emotion (is money that scary?) that leads to other irrational actions that have real life consequences.
So here’s my question to you … Do you really own the gold you think you own? Unless you are actually holding it, how can you be sure? And how pure is the gold (alloys) you think you are holding in your hands (assayer)? Not all gold is the same.
Actually holding gold, as opposed to holding a paper that says you do, brings another problem … how do you sell it? Or, how do you buy groceries with it (which goes back to how do you sell it … so you get currency you can use to exchange for other goods).
Are You Sure You Own Gold by Paul de Sousa raises the question of your actual ownership of gold bullion and discusses how you may know just what kind of gold you own. Fractional shares of the same bar is possible.
As with any investment there are two sides to the transaction. The first side is when you purchase (caveat emptor). This is the side most people spend their time and thoughts on. However, even more critical is the side when you sell (Caveat venditor, “let the seller beware.“) ! There is no value holding anything unless you can sell it. And believing that prices can only go higher may simply be more your wish than reality. In other words, thinking there will be someone willing to pay more than you did (Greater Fool Theory) may not hold true when fear has gone down.
Moral of the story: The purpose of investing is to accumulate wealth as financial capital (store of money) to replace your human capital (compensation for productivity) when you retire. The larger picture of wealth is the ability to pay for those daily expenditures that make up your Standard of Individual Living.
Note: This blog is not an endorsement for de Sousa, his firm, or gold as an investment.