Investing in Gold: Folly or Brainy?

Have you had it with stocks and bonds, and are you ready to try something new? Gold is an option, but make sure you know what it will and won't do for you before you buy.

A 1961 episode of The Twilight Zone details a gold heist with a surprising twist. Four criminals get away with the job by hiding in suspended animation chambers for 100 years. The plan banks on gold's enduring value, a quality that's particularly attractive to investors when the economy has gone south.

All that glitters

The concept of investing in gold divides investors into two camps. The first likes to preach enthusiastically about the metal's intrinsic value and its effectiveness as a hedge against inflation. The second will tell you that this precious substance is an underperforming asset, and its volatility outweighs any protection it might provide against deflating currency.

History speaks for itself

Looking at the past 100 years, the price of gold has demonstrated some volatile, unpredictable, and downright disappointing behavior. Between 1910 and 1970, for example, the per-ounce market price hardly changed at all. Adjusted for inflation, its value actually went down during this time; that's practically a lifetime of negative returns.

In the 1970s, the situation changed dramatically. Ultra high inflation eroded the value of the U.S. dollar, and the masses flocked to gold, driving the per-ounce price from about $40 to $675. Those who bought in the early 70s made a bundle, while more traditional investors lost value in their stock and bond investments.  

Unfortunately, those good times didn't last. Gold's price dropped in the 1980s and kept falling. In 1999, it was languishing around $260 per ounce. More recently, it ticked up again, to as high as $1,000 for an ounce, and then slid back to $770. These latter movements coincided with a devaluation and subsequent strengthening of the American currency.

Inflation hedge

One thing can be gleaned from a look at gold's history; the precious metal tends to move in the opposite direction of the U.S. dollar. When our currency falls, gold rises, and vice versa. It's this characteristic that fuels the argument that gold is an effective inflation hedge and the best protection against a global economic meltdown. If you find that idea comforting, there's no harm in stashing a little gold somewhere.  But understand that whatever gold gains you make when the dollar devalues, you'll have to give up again when the dollar rises. That's the simple nature of a hedge; you can't give up the downside unless you give up a little upside, too.  

As for the end of the world or a global economic meltdown, it's tough to say whether having gold on hand will help you. Maybe when civilization as we know it ends, gold will be the only accepted currency. Or maybe it won't be. It certainly didn't help the criminals in The Twilight Zone; they learned the hard way that even gold's value doesn't last forever.