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Fool’s Gold: Dangers Of Investing In Precious Metals

Fool’s Gold: Dangers Of Investing In Precious Metals

By Christian Stellakis

Edited by Nidhi Singh, Junior Editor, The Indian Economist

Unless you’ve been living with your TV on mute and your radio volume turned promptly to zero for the last decade or so, you have undoubtedly heard the barrage of advertising that is the precious metals industries’ marketing strategy.  Often featuring an obscure celebrity or a trustworthy-looking man in a business suit, these advertisements warn against the dangers of a fluctuating economy. Charts of inflation, debt, and government spending are all on display, highlighting the risks of fiscal uncertainty.  Just when you begin to doubt the stability of your investment portfolio, the silver (or in this case, gold) bullet is offered: the option to invest in precious metals.

 The advertising strategy is brilliant, but are precious metals, specifically gold, the ultimate answer to market fluctuations, a weakening dollar, and runaway spending?  Not quite.  Like any other investment decision, there are both advantages and disadvantages to owning gold.    Wisdom has always favored a balanced approach, and despite the impression you may receive from the spokesperson in the slick business suit, you probably shouldn’t be lining the walls of your cellar with gold bars and plates.  Here’s why:

 With the purchase of any physical precious metal assets, whether it be gold, silver, or platinum, fraud is a frequent, if overlooked, danger.  Fool’s gold is to this day a very real and costly risk of investment for precious metals.  Tungsten, a metal quite similar to gold in weight, is being used to “fill”gold bars and bricks.  What’s more, counterfeit extends beyond the street vendors and small-time merchants.  In fact, in Manhattan’s Jewelry District, a gold bar thought to be valued at nearly $18,000 was found to be filled with Tungsten, the gray element valued at no more than a dollar an ounce.

 The risks of investing in gold and other precious metals, though, extend beyond simple fraud and into the economics of the decision itself.  Despite gold’s reputation as being a hedge against inflation, one need only look at a chart comparing gold price and inflation to realize that, at least in the past decade, the relationship between the two has been spurious at best.  Since gold and other precious metals are physical assets, there is a significantly limited supply in circulation.  Therefore, the prices of such assets are very strongly linked to global supply and demand, rather than the rate of inflation.  Since it is based solely on the supply and demand, it has no value outside of the current valuation.  Gold pays no dividends and earns no interest, and since it lacks those characteristics, it is difficult to extract an exact value of gold.

Additionally, gold is a notoriously volatile investment.  Again, despite the insinuations of TV pundits, gold is not a risk-free investment, and it doesn’t consistently climb in value over time.  The value of gold has been known to vary substantially, and often decline even in the face of inflation.  From the mid 1980s to 2001, the gold market suffered an incredible 22-year bear market where it saw the value of an ounce decline from $670 an ounce to $258.

Gold is not the final answer to any investment portfolio.  Like any other option, the decision to invest in a physical asset must be made on balance, factoring in the possible advantages, along with the substantial, yet often misunderstood dangers.  And the next time you see a slick business man telling people precious metals are the financial messiahs, recognize that he may indeed be selling you fool’s gold.

Christian is a Junior at Hamilton College in Clinton, New York. As an honors student and member of the Dean’s List, Christian is pursuing a degree in Economics and Government. He was accepted into Hamilton after graduating Valedictorian of Chittenango High School, where he served as the Opinion Editor for the school newspaper. Christian is an avid member of the Hamilton College Debate Society and a frequent contributor to the political discourse at the college.

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