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Is gold a good investment? Show more Show less
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Is gold a good investment? Will it lead to capital preservation and help and investor realize a return on investment? The question is polarizing, with some investors known as "gold bugs" being obsessed by it and others being completely dismissive of gold as an investment.

Gold is neither good nor bad, it depends on the circumstances Show more Show less

Gold does well in some environments and poorly in others. The main determinant is whether real rates are positive or negative.
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Real rates are the driver of gold

Gold's performance is not tied to the level of inflation but to the level of real interest rates. This goes contrary to what many thought and is called Gibson's Paradox. When real rates are positive, gold does poorly. When real rates are negative, gold does well. https://www.investopedia.com/terms/g/gibsonsparadox.asp and https://www.nber.org/papers/w1680.pdf
Gibson's Paradox Gold Inflation Interest Rates Real Rates

The Argument

In the past, gold was strictly for ornamental use due to its brilliance, color, and the ease of which it could be shaped. With how it doesn’t rust or tarnish also contributed to it being seen as a precious metal and over time not much about its value has changed. In the modern era it’s considered an extremely versatile metal with significant applications across technology and aerospace, making it not just pretty but important. The price of gold is rather high, partially due to its rarity and in part due to the effort it takes to process it. However, the gold rate increases and decreases with supply and demand.[1] As the supply decreases the price increases, the same for the opposite. With the interest rate the same is said. When interest rates are high the price of gold goes down, when low, the price goes up. Since gold is considered a safe investment when interests rates are down, people try to place their money in something stable, hence gold. [2] It's not that gold is a good investment or a bad investment. It's just that when playing the market you have to be careful to not get burned.

Counter arguments

Gold is not quite a neutral entity but it’s how it’s acquired and what it’s used for that determines whether it’s good or bad. Gold can be a beautiful wedding ring or part of a microchip for a cell phone, or a part of a launch system for missiles. As a flexible material it has many uses that depends on the user. With acquiring gold though the process is not cheap. [3]While there are gold veins and gold deposits all around, actually acquiring that gold takes time. The process of extracting the gold from the rocks is also labor intensive and time consuming. This of course is one of the things that drives up the rate of gold but being good or bad solely relies on the method of how it’s acquired. The problem doesn’t lie in the actual process but the people who do this process. Is the labor fair, is the method destructive, is the nature around these mines preserved or destroyed in the process? These are the questions to ask and their answers define whether gold is good or bad.

Proponents

Premises

[P1] Gold's worth is effected by interest rates.

Rejecting the premises

Further Reading

The key paper on Gibson's Paradox is here. https://www.nber.org/papers/w1680.pdf Here is a good read on the arguments in favor or against Gold. https://mpra.ub.uni-muenchen.de/65484/1/MPRApaper65484.pdf

References

  1. https://www.investopedia.com/financial-edge/0311/what-drives-the-price-of-gold.aspx
  2. https://www.bullionbypost.co.uk/index/gold/gold-price-interest-rate-relationship/
  3. https://science.howstuffworks.com/gold4.htm

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This page was last edited on Monday, 26 Oct 2020 at 15:06 UTC

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