Gold is a Hedge NOT an Investment

With relatively recent economic turmoil, more and more people are thinking about buying gold and other PM's (precious metals). Gold can be a good hedge against inflation, it can preserve wealth, and it can be a useful means for barter. However, it is not a good investment as it will never pay dividends or real returns.

Gold is a commodity. It's value is derived from it's scarcity and usefulness in industry. It's real price, as with all commodities, is based on supply and demand and the labor required to procure it. Unlike other commodities the supply of gold and it's demand in industry have been and will very likely continue to be stable, and the real price is of gold is equally as stable. Therefore an investment in the real price and value of gold is a terrible investment.

The same characteristics that make gold a horrible investment also make it a great hedge against inflation and preserver of wealth. Because the supply and demand of gold is generally very consistant, the nominal price of gold in a given currency will fluctuate with that currency. If there is inflation or deflation, the price of gold in that currency will inflate or deflate accordingly.

This does not mean that world demand or supply of gold cannot change. I am simply making the point that the real value of gold is not likely to increase significantly. Holding gold over a long period of time will not pay dividends or provide a real return on your investment. The only thing it will do is protect your wealth from inflation.

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