Has Gold Lost Its Allure as an Investment?

Recently the U.S. debt ceiling raised its ugly head again after the Treasury Department started employing emergency measures such as tapping government retiree pension funds in order to fund government operations. This is because the Republicans do not want to lift the ceiling after the national debt reached its current $31.4 trillion level, mostly driven by pandemic era overprinting and release of $5 trillion cash infusion into the economy, and previously huge unpaid expenditures like the war in Afghanistan. The pandemic itself increased the balance sheet of the government to $8.4 trillion, which the Fed is trying to shrink through quantitative tightening.

Aggravating matters is the desire of the Fed to raise interest rates to arrest inflation. This actually results in more future costs for the government to pay back bond buyers. If the U.S. defaults on its treasury bonds because of the debt ceiling, this could result in damaging repercussions, most particularly the inability to honor claims for US treasury bond holders, critical capital and maintenance expenditures needed to run a country, as well as the salaries of the military and government employees.

With depressed earnings and a looming recession on the horizon, tax revenues would likely go lower. Less taxes collected just doesn't bode well for the situation and will contribute to a larger deficit.

This is why a lot of investors are looking for asset classes to protect them from a dangerous situation with the U.S. dollar and bonds. Default is one. But even without a default, the increasing debt has already caused strong concern for investors for some time now. Experienced investors have been looking for other investment classes to flee to.

Over the past few years, stocks and crypto have been the high flyers because of high liquidity brought about by low global central bank interest rates near or close to zero. Cheap debt, cheap materials and cheap energy fueled strong economic growth for many years. That situation appears to be no longer true now. Hence investors are looking for safer investment classes. One of those is gold.

Before President Richard Nixon ended the practice, the U.S. dollar was backed by gold. Dollar holders used it as a claim to that gold, like an IOU. When Nixon ended the gold standard, the dollar became a fiat currency, which basically means that the paper bills and coins took value not because of the gold that backed each dollar, but because the U.S. government said it was worth one dollar. That promise becomes less and less attractive as the unpaid debt becomes larger.

Gold is precious because it is both scarce, useful and beautiful. Although gold mining produces more gold from the ground, it is not mined to the extent that there would be a big surplus that dumps gold into the market and makes it cheap. Gold, as an element when purified, is the best conductive metal out there. It is used extensively in electronics and in semiconductors. It is even used sometimes in food as a very fine edible powder for fancy cakes. Of course, the most popular use for the public is for jewelry. Fine watches, necklaces, rings, bracelets, cufflinks and other decorative items are often valued for their beauty and elegance.

In terms of spot price as traded on the global market, when times are uncertain like during war and political uncertainty, gold has traditionally been a safe haven. Recently Bitcoin has tried to usurp that role, but defenders of gold argue that it will always be the best store of value out there.

One problem that could occur if gold prices rise suddenly is the negative impact on industries such as the semiconductor and electronics sector that use it for their products. Products that use gold as an input material will see their prices skyrocket.

Although the allure of gold for younger generations who grew up in a totally digital world has lessened, central banks around the world (including the US Fed) still stock it as part of their reserves. If these central banks see renewed interest in increasing their gold stockpiles, this can drive the price up significantly.

While it may not reach as high as risk-on investment classes like stocks and crypto, gold has a long history as a store of value. It may not be the investment that gives you the highest return, but it will almost always be considered precious.

For most people, the typical way to invest in gold is to buy jewelry. This works well, especially as a gift to your spouse or family. Aside from the monetary value, it also helps strengthen your relationships.

Another direct way is to buy physical bullion bars, which are also available as small as an ounce, or as coins. Gold coins may have their own collectible value outside the price of the metal itself.

If you just want to invest without holding it physically, you can buy the stocks of gold mining or refining companies or their Exchange Traded Fund (ETF). Take note that when the price rises, miners will likely try to extract more gold from the ground. As the supply increases, this will temper the rise in price.

Do your research first to try to understand the cycles of this industry before you do so. There is no right way to invest in it. It depends on your needs and use cases.

Gold has been around for thousands of years and it will remain in our lives as both a store of value and a thing of beauty that can be enjoyed for ages to come.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.