Is Gold considered as investment or insurance?

[freedom]

Buying gold does not produce any cashflow. And you will only realize the value of gold when the fiat currency loses its value assuming the objective of buying gold is not a speculation and not intended to sell for a profit in short term. From this perspective, gold is more like an assurance than an investment. Like assurance, it is not for everyone. E.g. Insurance against the nose/hips for the actors/actress. In that sense, should gold be just bought by those super rich rather than the ordinary folks?

Can we assume that quite some gold "investors" actually are trading gold for short term profit or purely speculating gold?

so should value investors ever consider investment in gold?

[Musicwhiz]

I consider it to be a form of insurance, rather than investment. As you said there are no cash flows!

But it's nice to stare at the shiny metal and stroke it now and then if you feel dull (no pun intended)!

[corydorus]

I got some recently not because i like to pay for them at this price but for the Insurance inview of so many instability factors.
That's doesn't mean there is reduction in absolute stock amount invested. What i did is to utilize my cash sitting in the bank to do this.

Cory

[kazukirai]

In my opinion, it's for insurance.

Investment, after all, implies that there are economic returns to the asset.

In Gold's case, the main benefits are non-economic. It's only value is to protect against inflationary pressures and for capital gains (above inflation).

Inflation erodes wealth i.e. you buy less burgers (or pratas if you prefer) tomorrow than today. Therefore, Gold, as a hedge against inflation merely allows you to buy the same number of burgers tomorrow as today.

Gold, for capital gains, means that there has to be demand for it. What would those drivers of demand be? Off hand, I can think of two- Fear and Jewellery. Some of the demand for jewellery is for vanity and some as a hedge against inflation (not very smart since one has to pay the jeweller for overheads and the likes). As for Vanity, the higher prices go...I'm sure jewellers will try to market something else as the next fashion item (either that or mixing stuff in Gold and calling it White Gold or Purple Gold) in order to maintain their margins.

Which brings us to Fear. This is a very powerful force and it is a very real one. For people in countries that fear the debasement of their currency (e.g. the US, Euro, Vietnam etc.), Gold may seem like a very viable option at this point in time but I question though whether these people will say the same thing in 10, 15 or 20 years.

How do you tell when is the time to get out of Gold? How do you tell when the party is over and the punch bowl is taken away when fundamentally it doesn't earn you anything?

[freedom]

I always think Gold as an inflation hedge is quite a myth. As gold can't be used as a currency any more, how could gold ever protect the wealth? under current financial system, the fiat currency is very unlikely gone from the world.

---

in my opinion, the super 10-year bull for gold is substantially supported by the creation of EURO, which could threat the dominant position of US Dollar. On top of that, FED has been "printing" quite substantial amount of US dollar.

if EURO was to be gone in the next few years, Gold probably would crash like what happened in Japan in 80s. Super bull for US dollar could start coupled with FED to raise the interest rate.

[corydorus]

Alot of people will do very well today if they can just preserve what they earned because problem is quite alot of people cannot make it even when they do investment, with negative returns.

Today i have S$1K that can buy me 1 year meals of certain standards. How do i maintain this purchasing power 20 years later with this original S$1K for same standard of meals? We need option to PRESERVE hard earn money into "physicals".

OPTIONS
1. Buy 1 full year meals now with the S$1K. And eat them 20 years later. Problem: Degrade
2. Buy stocks and hopefully you can buy same meals 20 years later with the original investment. : Investment Risk and Time
3. Buy a TV. Sell it 20 years later. Problem: obsolete
4. Buy S$1K value of sands, and sell it 20 years later. Problem: Space
5. Buy USD. Problem: Prininting machine-devaluation, inflation and low interest rate.

Gold seems to be able to mitigate most of it quite well.

Cory

[kazukirai]

I always think Gold as an inflation hedge is quite a myth. As gold can't be used as a currency any more, how could gold ever protect the wealth?

Hi Freedom-san,

I found a chart showing Real Returns (see the chart in the middle of the page here) of Gold as an investment. The chart's supposed to be from Jeremy Siegel's Stocks for the Long Run (it would be nice if anyone can confirm this). Anyway, from the chart, it appears that the myth of Gold as an inflation hedge may not be so untrue after all. From the chart, we can see that there are flucuations but in the VERY long-term, real returns mean-revert to about US$1.

I don't think Gold can be used as a currency as that has too many problems in itself- storage, portability, debasement...history's full of those examples. But for countries where the fiat currency is horrible, Gold is a form of store of value i.e. Earn Fiat Money -> Buy gold -> Sell for fiat money in better times. I've personally seen this mentality prevalent in Vietnam. I can imagine the same mentality among people in (hyper) inflationary economies. Of course Gold isn't the only store of value. Some prefer Real Estate...

Of course, it's all about individual perspective as well. Try telling the above to someone in the 90s/early 2000s who bought Gold in '80 or '82 before the current run-up and you're likely to get a different response OR try telling the above to someone who bought Gold in the early 2000s and is still holding to it now. They would probably both disagree that Gold has paced inflation and yet they would also disagree with each other. And yet, if you believe Siegel's data, Gold's real value has flucuated around US$1.

[Jared Seah]

With that definition that without cashflow is not an investment. Now I am scratching my head:

1) What about savings account earning cashflow that's below inflation rate? Investment or hedge? Or subsidy to bank?

2) What about stay-in property (OK, for those precision guys I meant lease-holds too). No cashflow in. More often than not it's cashflow out. Investment or hedge?

3) Gold and silver has been currency for all civilizations throughout thousands of years. The gold standard was removed only "recently" in 1971. I think I better stick with history and there must be a reason why gold and silver is accepted by all civilizations.

I just want to share that the "smart money" families in Greece have already bought gold (especially Romanian gold) last year when the Greece crisis erupted. It's not just a hedge, it can be wildly profitable if Greece goes back to the Drachma. Even converted to euro after 1 year, you can exchange the gold to lots of interesting properties or companies (can even buy political favours) for their next generation. These families are still driving their porches and partying at the islands. Its more than an hedge.

Even if they decide to emigrate, this gold is easily convertible to any currencies in the world at a profit from what they have bought last year. Appreciation of gold over the past year is more than the inflation rate in most countries.

We can be "philosophical" with gold since SGD is strong like CHF, NOK, AUD. But if our currency is like the EUR, GBP or USD.... 1997 Asian financial crisis was not that long ago...

I guess the perspective is better answered by friends in HK and AU visiting Singapore - one would say Singapore so expensive! The other will say Singapore so cheap!

[freedom]

I always think Gold as an inflation hedge is quite a myth. As gold can't be used as a currency any more, how could gold ever protect the wealth?

Hi Freedom-san,

I found a chart showing Real Returns (see the chart in the middle of the page here) of Gold as an investment. The chart's supposed to be from Jeremy Siegel's Stocks for the Long Run (it would be nice if anyone can confirm this). Anyway, from the chart, it appears that the myth of Gold as an inflation hedge may not be so untrue after all. From the chart, we can see that there are flucuations but in the VERY long-term, real returns mean-revert to about US$1.

I don't think Gold can be used as a currency as that has too many problems in itself- storage, portability, debasement...history's full of those examples. But for countries where the fiat currency is horrible, Gold is a form of store of value i.e. Earn Fiat Money -> Buy gold -> Sell for fiat money in better times. I've personally seen this mentality prevalent in Vietnam. I can imagine the same mentality among people in (hyper) inflationary economies. Of course Gold isn't the only store of value. Some prefer Real Estate...

Of course, it's all about individual perspective as well. Try telling the above to someone in the 90s/early 2000s who bought Gold in '80 or '82 before the current run-up and you're likely to get a different response OR try telling the above to someone who bought Gold in the early 2000s and is still holding to it now. They would probably both disagree that Gold has paced inflation and yet they would also disagree with each other. And yet, if you believe Siegel's data, Gold's real value has flucuated around US$1.

hi, kazukirai-san.

Since 2001 til now, Gold has outpaced inflation many times, imo. especially, if you consider the short span of almost deflation in early 2001 -2003, gold ran up despite of low inflation(dis-inflation). very difficult to tell that Gold is really an inflation hedge.

---

With that definition that without cashflow is not an investment. Now I am scratching my head:

1) What about savings account earning cashflow that's below inflation rate? Investment or hedge? Or subsidy to bank?

2) What about stay-in property (OK, for those precision guys I meant lease-holds too). No cashflow in. More often than not it's cashflow out. Investment or hedge?

3) Gold and silver has been currency for all civilizations throughout thousands of years. The gold standard was removed only "recently" in 1971. I think I better stick with history and there must be a reason why gold and silver is accepted by all civilizations.

I just want to share that the "smart money" families in Greece have already bought gold (especially Romanian gold) last year when the Greece crisis erupted. It's not just a hedge, it can be wildly profitable if Greece goes back to the Drachma. Even converted to euro after 1 year, you can exchange the gold to lots of interesting properties or companies (can even buy political favours) for their next generation. These families are still driving their porches and partying at the islands. Its more than an hedge.

Even if they decide to emigrate, this gold is easily convertible to any currencies in the world at a profit from what they have bought last year. Appreciation of gold over the past year is more than the inflation rate in most countries.

We can be "philosophical" with gold since SGD is strong like CHF, NOK, AUD. But if our currency is like the EUR, GBP or USD.... 1997 Asian financial crisis was not that long ago...

I guess the perspective is better answered by friends in HK and AU visiting Singapore - one would say Singapore so expensive! The other will say Singapore so cheap!

1) investment does not guarantee profit. there is always failed investment.

2) It is just an asset only, most of the time, stay-in properties should not be considered as investment.

3) As I mentioned earlier, I view gold as an insurance against fiat currency. So I believe the wealthy in Greece were buying gold against the fiat currency, not as much as trading for a short term profit.

Gold, as an investment, is hard to justify.

[kazukirai]

1) What about savings account earning cashflow that's below inflation rate? Investment or hedge? Or subsidy to bank?

My thinking is: Combi of Subsidy to bank + Service (Security and Liquidity)
[You wouldn't have to worry about someone finding out that you have tonnes of money hidden in the Milo tin under the bed and stealing it. Also, with carrying one ATM card, you save the hassle of carrying too much cash and yet being able to access that cash pretty easily when you need it]

2) What about stay-in property (OK, for those precision guys I meant lease-holds too). No cashflow in. More often than not it's cashflow out. Investment or hedge?

You'd have to rent if you didn't buy. I see housing as a form of forced savings with a question mark component on your return of and return on principal. The million dollar question is cashing out those savings when you want/need to.

3) Gold and silver has been currency for all civilizations throughout thousands of years. The gold standard was removed only "recently" in 1971. I think I better stick with history and there must be a reason why gold and silver is accepted by all civilizations.

Freedom-san has probably put it best. And your own example has also made it clear- Gold stores value pretty well when one's currency is being devalued by the printing press.

But to call Gold an investment is, imo, difficult to justify and still remains to be seen.