Thinking of Buying Gold? Read this First

Gold is arguably in bubble territory now.

While I personally love gold as a safe haven asset for a whole number of reasons, that doesn’t make it immune to hyped up speculation.

There are so many compelling arguments to own some gold in one’s portfolio. But to make a big bet on it while everyone is rushing in at the same time can be very dangerous.

We have been here before.

Buying at the peak can be painful to say the least.

Let’s look at the following graph from Goldprice.org: 

In US dollar terms, if you bought at the peak in 1980, it would have taken you around 26 years to be able to get your money back. If you add in the effect of inflation during this period, the result is even more devastating.  

The graph also shows a peak in 2011. It took around nine years to recover from this.

Now, to be fair, the graph does look better when measured against the British Pound:

However, there were still plenty of points where gold was flat for decades, which goes to show it’s not always a reliable inflation hedge.

The key is to understand what gold is. Fundamentally, it’s a currency and a form of insurance against economic armageddon – not a growth asset. It belongs in a diversified portfolio, but it’s not what will make you rich.

What grows wealth over the long term are businesses that produce value. Gold simply helps to preserve value – and only if you avoid overpaying when enthusiasm runs high.

I could go on about gold’s many virtues, but that’s not the point of this article. My goal is to warn those who might be tempted to go all-in right now.

Gold is getting too popular, and that in itself is a warning sign. This doesn’t mean it won’t go a lot higher – the point is to proceed with caution.

Disclaimer: The information contained in this article is provided for general information purposes only and should not be construed as personal financial advice or a recommendation to buy or sell any investment. Past performance is not a reliable indicator of future results. Always seek advice from a suitably qualified financial adviser before taking any action.