Investing in Gold Is at Record Highs. That's Not Necessarily Good.

Life
ByJames Dennin

Gold is so hot right now, and that could spell trouble for everyone in the global economy.

Investors bought a record 1,064 tons of gold in the first half of 2016 — and they weren't buying earrings. In fact, demand for "investable gold" (bars, gold coins or funds that buy gold) has begun to consistently outpace demand for gold jewelry, according to a report released this morning by the World Gold Council

What does that mean?

For one, demand for gold is a proxy for global economic uncertainty, which means a growing number of people are fearful or mistrustful of governments and banks. The logic of buying up gold when you are scared is that it has low correlation with other investments — like stocks, bonds and cash — which protects you if markets come crashing down like during the Great Recession.

The character Ron Swanson on NBC's Parks and Recreation, known for his distaste for and distrust of government, is somewhat of a parody of a gold bug, demonstrating the pragmatism and paranoia that comes with the territory. Swanson once said: "You won't find any bank statements. I've heavily invested in gold which I have buried in various locations in Pawnee... Or have I?"

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It says something that the tonnage of gold purchased in 2016 is 16% higher than even in the first half of 2009, the peak of the financial crisis: That shows people like Swanson are truly more fearful than ever.

So, is it a good idea to buy gold?

The two major arguments for buying gold are that it is a "safer" investment than stocks, and that it protects against inflation — meaning it's safer then just keeping all your money in the bank.

There are big problems with the latter argument.

As the below Tweet from a Bloomberg study explains, gold may not have been as good at protecting people's money from rising prices as they think it has.

If you're determining the price of gold using today's dollar, prices actually peaked in 1980, while other haven assets have done better.

The most surefire way to actually protect against inflation is through special government bonds called TIPS, short for Treasury Inflation-Protected Securities. They adjust in value to match price inflation directly, so the less valuable the cash in your bank account becomes, the more valuable TIPS get. 

You can buy them in increments as low as $100.

To be fair, anything can happen

Gold's safety relative to the stock market is a more challenging argument to counter.

Bill Gross, one of the most prominent investors in the country, recently explained that now is a good time to be buying "real assets" like gold to weather economic uncertainty. Real assets are assets that, unlike a bond or cash, you can physically hold and that have value that's manifest — a comforting feature if you fear the apocalypse.

On the other hand? It's rarely a good idea to buy something when the price is shooting up. Remember that the rush to buy gold may be something of a self-fulfilling prophecy: Gold prices go up, people realize it is because of economic uncertainty, so people buy more gold and drive up prices even more — until the bubble bursts.

The simplest solution, perhaps, is to view gold not as a "hedge against" uncertainty, but rather an investment in uncertainty. If you have the extra cash to throw into a gamble on global unrest, then by all means, have fun investing in a low-cost gold exchange-traded fund

Otherwise, steer clear, and focus on the sure bets — paying down debt, improving your credit score, and saving money.