What speaks for an investment in Gold?
And more important: what speaks against an investment in Gold?
The basis of all decisions in our life is to evaluate the costs and the benefits. What speaks for Gold, what against? When we listen to the so called "Experts", the only thing we learn is that the experts have different opinions. We have the "Ultra-Bears" expecting the global monetary system to implode and gold being left as the only valuable currency. On the other side we have the supporters of the capitalism. They see in gold only a small economic value and prefer to invest in stocks and bonds.
So what we need to do is to leave the so called experts behind us and have an unemotional look at the pro and contras of gold. What are the price movers of gold?
There is generally only one price mover: demand and supply.
In the short-term, the gold-market is driven by news and emotions. Thousands of financial players buy and sell gold on a daily basis driven by headlines. It is impossible to forecast the gold-price for the near future. Otherwise you have to know how the market-participants are going to react (which is impossible).
In the long-term however there are some clear and important drivers influencing the demand and supply and hence the price of gold in the long-term:
Currently the most heard argument to buy gold is the fear of the collapse of debt-burden currencies like Euro, Yen, Pound Sterling and US-Dollar. Gold offers protection against the impairment of paper-money. Gold has to be seen as a hedge or insurance against the worst case scenario of a currency implosion. Backed by fear and mistrust against paper-money, the gold-price rallied already extremely since the year 2000. Gold has a long history as a currency and has to be seen as the counter-pole to the USD. Whenever the USD get's weaker, the gold-price in USD surges, if the USD gets stronger, the gold-price weakens.
Inflation and Hyperinflation
An inflation is a slow devaluation of the value of money. With your money you can buy less and less goods, prices rise. A moderate inflation is not to worry, because it usually means higher interest on your savings account. With the effect of compounded interest the value of your money stored on a a savings account should remain.
A hyperinflation though, is an unstoppable increase of prices. The trust in the value of money is so damaged, that prices go up and up every week, day or even hour as everybody exchanges money into goods as soon as possible. Gold offers a very good protection against a hyperinflation in your country.
In war-times gold offers a solid storage of wealth and will be bought. The uncertainty about the future is very high: which sovereign-bonds, currency or equity does still have a value in the future? And what will be destroyed or expropriated? Gold in a safe offers protection against these uncertainties.
Rising physical demand
Gold is not just a financial asset it's also used as jewel and to a limited extend in industrial equipment. The rising demand from the Asian countries India and China (the biggest buyer's of gold) already pushed prices higher. A rising demand will boost the gold-price, a shrinking demand will do opposite.
Limited & unique commodity
Gold is a limited and unique commodity. Most of the available gold is already mined. Experts expect that all physical gold on earth together builds a cube of 20 meter edge length. These 8000 cubic meter gold is accompanied by a rising population of over 7 billion. Equally shared, everyone on earth would get a small gold cube of 1cm2.
With gold, wealth can be stored in a small place and it has no expiry date. Other assets are bulky or short-lived. A currency can get devalued, a bond not paid back, a stock bankrupt, a house burned down and a farm can be plagued by drought or vermin. All these qualities make gold a unique commodity.
A deflation is a constant decrease of prices in a economy. Services and goods gets cheaper over time. A deflation can be very bad for the economy as nobody invests money or buys goods because tomorrow it will be cheaper. Deflation is the opposite of inflation and can occur if a downward spiral of falling house and equity prices starts, like in Japan 1990 - 2010. Even the gold-price might decrease if a global deflation starts. According to some economists, the starter of an inflation might also be the demographic change in most economies. As many retirees at the same time start to sell their homes and equities and less and less young people are able to buy them.
The biggest risk for a decrease of the gold-price is a severe decrease of demand. Gold is very popular at the moment and many expectations about the future are already priced in. If the confidence in the economy and in the currencies among the investors is back, people might look at other assets then gold, like bonds and stocks. A sudden decrease of investor's demand will push the gold-price down. Also a falling physical demand for coins and jewels has influence on the gold-price.
If through a increase in production or gold-sales by central-banks a big amount of gold comes to the market, the price is under pressure. While new gold is mined, the existing gold is not used like oil or coal. Most of the gold get's recycled and used again and again.
Limited use of gold
With the exemption of a small industrial usage, gold has no real use than to be gold. Although it's beautiful to look at, the human has no real use of the commodity. You can not eat it like rice or corn, you can not burn it like wood or oil, you can not build a house with it or have an stable income of its interests and dividends. The only thing you can do with gold is hoarding it and hope its value remains. But nobody can guarantee that you can buy a bushel of wheat with your gold in a real crisis. If you are extremely concerned about the future and want to prepare yourself, you should consider a house with a big garden, a farm or a forest.