ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

Retirement made easy: Should I invest in gold?

Updated on August 18, 2011

Gold as a safeguard against inflation

Gold has investment markets running wild at the moment with the price of bullion seeming to set new records almost every week. That is prompting many investors and savers to wonder whether they should be investing in gold as a safeguard against inflation and as insurance against turmoil in financial markets.

The recent fascination with gold marks a huge turn from recent decades. Gold’s previous peak was almost 30 years ago, and for most of the time since its price has languished giving investors a poor return. Its revival has much to do with the re-emergence of two concerns in the global economy, inflation and turmoil that I’ll discuss in more detail.

A store of value over the ages

1933 double eagle gold coin
1933 double eagle gold coin

Why invest in gold

The main reason for gold’s rebound is the fear that inflation may emerge again. Rising prices were a blight on economies though the 1970s. Inflation was only contained by the Federal Reserve under Paul Volcker imposing such tight monetary policy in America that it caused a recession in the 1980s. Combined with credible inflation targeting in many other economies this ushered in decades of low inflation and stability that many economists have taken to calling “the great moderation”. This golden age was a great time to be an investor in almost any sort of asset from housing to stocks and even government bonds. The one asset that performed poorly was gold, partly because investors saw little need for it has a hedge against inflation that seemed to have been defeated. Many economists were calling it a relic of a barbarous age.

Yet in 2007, as the price of oil, food and other commodities surged it seemed that inflation might return from the dead. Those concerns have only been exacerbated since 2008 when central banks across the world slashed interest rates and started printing money to avoid a great depression. So far there are few signs of inflation, partly because the world economy has not yet recovered from its shock, but many economists have warned that prices will rise again once global economic growth returns to normal.

The second big reason for the rise in gold prices over the past few years is concern about the stability of the financial system and the security of other sorts of investments such as stocks and bonds. That worry is being stoked by turmoil in markets, instability of banks and the growing indebtedness of governments. Gold-bugs argue that whereas governments can default on debts, making their bonds and treasury bills worthless and that central banks can print money, making cash worth less, there is very little new gold being mined. In the technical jargon, gold is not correlated with other assets. In plain English, when the prices of stocks and bonds fall (or rise) gold does its own thing.

Why investing in gold is a bad idea

The case against owning gold is that it doesn’t yield anything. Cash on deposit or bonds all produce income but gold just sits there looking shiny until you need it.The fact that it is an uncorrelated asset is helpful but I suspect most people would be better off holding low volatility assets such as inflation-protected bonds (Tips or Linkers)The safety that some gold in your portfolio may offer has to be offset against the profit that might have been made by owning other assets. Looked at this way gold become rather expensive insurance for most people.

There is some evidence in portfolio theory studies that show how holding a small percentage of gold (5% of the portfolio) can give an overall benefit, but in truth the benefits are so small against a diversified portfolio that most people wouldn’t notice it in their private holdings (it is a different matter for big institutions where the difference in performance that a percent here or there gives them can mean the difference between being at the top of the league tables).

Private investors also need to weigh up all the other assets they own, such as a house, as well as their liabilities. In most cases a house and a mortgage provide plenty of protection against inflation (during times of high inflation prices of real assets, such as houses, should rise while the value of your mortgage stays the same – in other words in inflation-adjusted terms your mortgage gets smaller).

For that reason I won’t be investing in gold ETFs or similar gold funds in my retirement fund in coming years.

Comments

    0 of 8192 characters used
    Post Comment

    • Zee Candler profile image

      Zee Candler 

      7 years ago from Pittsburgh, PA

      Gold, silver, oil, ag. Forget the dang S&P index!

    • Jayne Lancer profile image

      Jayne Lancer 

      8 years ago from West London, UK

      I absolutely agree with you. There are so many better ways of investing money than in gold. I don't even buy 'real' jewellery for that reason, and my husband says it makes more sense to collect postage stamps than gold.

      Glad to see you're making people aware.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)