Is Gold a Good or Wise Investment for 2012?

Gold: Investment or Store of Value

Is investing in gold a good or wise investment? I think it depends on why you are buying the precious metal. You need to ask yourself; is gold an investment or a store of value? 

What is an investment?

There are many definitions for investment but I like to use the economic definition because I believe it gives clarity to my point. An investment is an amount set aside for future production; consumption is delayed in order to use the resources for future production or benefits.

Some may choose to use a broader definition of investment that includes speculation on asset prices. As an investor you will be better off to distinguish between the two kinds of expenditures.

If an asset provides cash flow, dividends, or rent; the value of the asset is dependent upon those benefits produced. How do you value an asset that produces no economic benefit? You must hope that someone else is willing to pay more for that asset than you did. Is this a wise investment or a hopeful speculation?

What is a Store of Value?

Any physical asset can be considered a store of value if it has value as a medium of exchange, can be stored, and can be reclaimed at a later time. What is considered a store of value can be different around the world. What might be of value to one society might hold little or no value to another.

Gold is a commodity that would be considered of value almost anywhere in the world. Given the fact it is one of the rarest substances on earth and is easily stored; Gold is an excellent example of a good store of value.

Why Do You Want to Buy Gold?

Do you want to buy gold as an investment because it’s going up and others are making profits?  Or do you believe your finances call for having a portion of your net worth as a store of value? If it’s the latter, that is a decision you can make and feel comfortable with it! If it’s the first then you should consider other options. Buying an asset with no cash flow because you believe someone will pay more at a later time is speculation or gambling; not sound investing.

Buying Gold as a Store of Value

Investors with a high net worth may choose investing in alternative asset investments; including holding gold directly as a store of value realizing it is not a good investment. To me, it does not make sense for small investors to buy gold directly as a store of value. What is a thousand or even ten-thousand dollars of gold going to do for you? In small lots you will have high commissions, high bid/ask spreads, and high costs to hold (storage, delivery, security, etc.)

Investing in Gold Stocks and ETFs as an Investment

The average investor who wants to participate in gold investing should consider assets that create cash flow. Gold mining shares and ETFs provide the opportunity to invest in gold indirectly through an entity that is actually an investment. In addition, stocks and ETF investments are easily traded with low commissions; small bid/ask spreads, and zero additional cost to hold.

Investing directly in gold should be reserved for investors who want a store of value. Investing indirectly in gold through individual stocks and ETFs is the best way for those who are looking for a good investment in gold.