Thoughts on Gold

Cashforgold.com ads are nearly inescapable on television. With gold at $1145 per ounce and climbing, it is getting a lot of attention as an investment, as a hedge against inflation, and protection from the falling dollar. John Paulson, a billionaire hedge fund manager, has started a new fund for gold and mining. With gold getting all this attention, is it a good place for the average person to put their money?

Well, lets tackle the investment question first. Gold is not an investment. (At least in my humble opinion.) An investment is utilization of capital that will allow it to grow into something more than the original investment. Let's say that you decide to make a $500 dollar investment in a Portland, Oregon personal chef business. That business can take on new clients, offer new services, and grow your investment to something very large.

Now, if you invest that same $500 into a half an ounce of gold, that gold will never change. It may be a pretty paperweight, but it can't spontaneously become an ounce of gold. It's never going to replicate, no matter what you feed it. The "return" on your investment is subject to market prices, not organic growth.

Speaking of market forces, what happens when the price of wheat skyrockets? Farmers plant more wheat, which brings prices back down. The same is true for gold. Price goes up, and we get businesses like Cash For Gold taking advantage. Also, mining companies dig more tunnels, which also brings prices back down.

Then there is also tried-and-true common sense. Unfortunately, one of the golden rules of investing is that if its getting lots of media exposure, and people are talking about it, you've already likely missed the boat. You may catch a bit of the final upswing, but you will likely find yourself in the same situating that the people who jumped into the housing boom ended up in. Remember when oil was $140 a barrel and people said it was never going down?

I'm not saying that gold shouldn't be a small portion of your portfolio. Just don't get caught up in the hoopla. It's overrated.