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Is Gold a Good Investment?
Is Gold a good investment? It depends on why you are buying the precious metal. During your investment analysis you need to ask yourself: is gold an investment or a store of value?
What is an Investment?
There are many definitions of 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 from future production or benefits.
Some investors may choose to use a broader definition of investment that includes speculation on asset prices. But speculation that is not based on benefits from the asset is a form of gambling. As an investor you will be better off to distinguish the difference between the two kinds of investments.
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 gold a good 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 and traded, gold is an excellent example of a 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 ! If it’s the first then you should consider other options (i.e. gold mining stocks).
Buying an asset that never produces cash flow because you believe someone will pay more at a later time is speculation or a form of gambling; not sound investing. Investors who invest directly in gold should be seeking a store of value, not a good investment.
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