Yes, 2013 was tough on gold, and many people turned their backs on the precious metal when its price began to fall. But the “what have you done for me lately?” attitude is not always the right approach. After all, gold saw annual growth for 13 straight years before 2013. So let’s look at the metal in a bit more detail as we head into the New Year.
Why gold? Simply put, it is the oldest currency still in existence. However, there are three basic reasons why people invest and hold onto gold, and where its value comes from: hedging against inflation, hedging against instability, and its use in manufacturing jewelry (and to a lesser extent, other industries like technology).
These reasons are derived from gold’s core attributes. The metal is rare and unable to be printed or reproduced; the US Mint cannot simply print more gold, should the supply ever run out, so it wards off inflation. Also, most commodities deteriorate over time, but gold does not. When properly cared for, gold will be preserved without diminishing. Lastly, gold is highly desirable. Regardless of its current market price per ounce, demand for gold is high, especially in the jewelry industry.
So why is gold so hated right now by many in the investment world? Let’s look at a few common reasons.
The US is recovering economically. The logic is, if the economy is recovering, there is no need for a hedge against instability. The truth is, employment has not increased at the same rate as the population, so while more jobs are being created, there are more people trying to get those jobs.
The stock market is doing well. The logic is, if the market is doing well, there is no need to buy gold. The truth is, some stocks, like Netflix (NFLX) and Amazon (AMZN) have broken records this year, but they are still not turning justifiable profits.
To a more general point, even if the above arguments were true, you should still buy gold so you are protected the next time a recession hits or the stock market crashes.
A few arguments in favor of buying gold are because China is now the biggest consumer of gold; if you don’t buy it, someone in China will. Also, the price is low now, but will eventually increase again, so it is at least a little higher than the cost to produce the metal in the first place (currently, the price per ounce and cost to produce an ounce are roughly the same).
In short, emotions run high when it comes to gold, and many have turned their backs on it this year due to the price decline. But, gold historically has paid off exponentially in the long run. Those who argue against it are not looking at the bigger picture; they are only focused on the here and now, which is a dangerous perspective in the investment world. Gold is on sale, so this is a great time to buy!