In these turbulent times many investors choose to flee to gold as a safe haven, rather than investing in equities or businesses. Gold is viewed as the ultimate hedge against inflation, as there is a limited global supply compared to fiat currency. While the value of any national currency depends significantly on the amount of tender issued by the country which the investor lives in, this clearly cannot take place with gold.
However, gold makes for a poor investment because it is simply not a productive asset. As opposed to purchasing a business or making an investment, where you are hoping to receive earnings through dividends and expansion, the value of gold is determined by how much traders are willing to purchase gold for. The price of gold generally increases when the economy is in a downturn and there is widespread fear, while the gold price generally tends to lag the broader management when investment conditions are more favourable. The gold itself however, does not actually produce anything.
The fact that gold is not a productive asset has meant that historically it has only barely outperformed inflation as an investment. While buying gold is like going long on fear and hoping people become more and more fearful, investing in businesses is evaluating the earning power of a company betting on human production – which has been a far better bet the
last couple of centuries.
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Motley Fool contributor Marcello Pinto has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.