Should you invest in gold before the next recession?

5 Reasons for Gold and 5 Reasons to Invest Elsewhere

Credit: Max Pixel

In Defense of Gold-bugs:

1. Gold is Scarce and Keeps Up With Inflation

Many Gold-bugs tout gold as a long term commodity investment that preserves wealth. They argue that regardless of the inflating dollar, gold will always at least keep up with inflation in the long run because gold is a scarce and limited resource. That is, one of Gold’s best properties it that there is only so much on Earth to be mined.

2. Newly Mined Gold is Flat-lining Relative to Human Population Growth

Although the amount of new gold being mined has historically been proportional to human population growth, this ratio has declined in recent years. The Metals Economic Group states that “ gold ounce discovery is not keeping up to the rate needed to replace mined ounces.” At this rate of population growth, there will be a larger amount of money chasing a limited supply of gold, leading to increased prices.

3. “God’s Money” Will Replace Fiat Currency in the Long-Run

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The average life expectancy of a fiat currency is 27 years.

Although a total fiat currency meltdown may seem far fetched at first, history would argue otherwise. The average life expectancy of a fiat currency is 27 years. However, outliers to this average include the UK, whose fiat pound has lasted over 300 years. The U.S. has been running on a fiat currency for almost 50 years since Nixon took the dollar off the gold standard in 1971. If citizens lose faith in fiat currency and the financial system collapses, gold would skyrocket.

4. Always a Commodity

For those that don’t believe in financial doomsday, gold still may be an okay investment. Regardless of whether there’s a collapse, people will still want gold for decorations like jewelry and furnishings, so there will always be some demand. In addition to decorations, gold has other uses in phones, computers, and aerospace technology, where its durability and dependability as a conductor is highly valued. Gold is even used for pigmentation in glass-making. Gold has been used and valued since Ancient Rome as a beautiful decor, and with its implementation in modern technological devices, it will likely be used for centuries to come.

Gold has been used and valued since Ancient Rome as a beautiful decor, and with its implementation in modern technological devices, it will likely be used for centuries to come.

5. Short-Selling Profitable Investment

Other investors in gold simply buy the asset when prices are low, which is usually during an economic expansion, and then sell the gold once it peaks during a recession. Quick, short-selling of gold, much like that of stocks or bonds, is far less common. This can be a benefit because there’s less competition in the gold trading market.

The Case Against the (Not So) Precious Metal:

1. Not an Inflation Hedge

Credit: Real term

2. Gold is Not a Necessity in Financial Doomsday

Secondly, during a financial doomsday, it’s quite possible that gold wouldn’t be a hedge against fiat currencies, as people won’t be investing in gold when they can barely afford rent and other necessities. Thus, it is arguable that commodity assets that are necessities, such as affordable housing, food, water, and energy, are a far better investments than gold, even in the case of a fiat currency meltdown.

3. Can’t Go Back to the Gold Standard

Another argument against gold as “God’s money” in the long term is that there’s no longer enough gold to support the expansive, global economy. Gold bullions would need to be divided into ounces for proper exchanges.

4. May Not Always be a Demanded Commodity- or a Commodity at All

As alternatives for gold are created that look like gold and are as sturdy as gold, the former commodity currency won’t be as demanded for jewelry or furnishings. Other cheap natural and engineered metals and products exist as an alternative. Additionally, investors against gold may warn that just because an asset is an “okay” investment that will always have “some” value as a commodity, doesn’t mean there aren’t better places to invest money.

5. Not that Profitable for Short-Selling

For investors who buy gold in the short term to sell off during recessions, gold may return far less than other assets could have yielded if bought during a trough and sold during a peak, such as stocks. Gold hasn’t gone up or down that much, aside from a handful of spikes over the past fifty years. Arguably, investors are better off trading stocks.

So Yes or No to Buying Gold?

In the long term, several of these cases rest on whether you think there will be a loss of faith in the US dollar and other fiat currencies. For investing in gold in the short term, it may be profitable to have a well-performing asset during recessions, while stocks lead a portfolio during expansions. Either way, a well-diversified portfolio is the key, and it’s up to the investor to decide if gold will be a part of their portfolio strategy. For myself, I’ll be investing a small amount in gold, but no more than the generally recommended 5–10% of net worth.

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