Beating Broke

Gold! Through the eons, it’s been a much sought after commodity. After all, it’s shiny and stuff. Even in the investment world, it’s the wonder investment. It’s touted as being the “can’t fail” investment for these uncertain times. Unlike stocks, gold is a physical thing. You can buy gold by the bar or by the ounce. And did I mention that it is a rock solid investment? Or is it?

The price of gold appears to hold a somewhat inverse relationship to the economy.  When times are good and the economy is rolling, the price of Gold goes down.  When times are bad and the economy is tanking, the price of Gold goes up.  Take the last few years for instance.  As the world’s economy has tanked, the price of gold has inversely risen significantly.  Why?  Because, whenever the economy tanks, the value of the dollar goes with it.  Now, stop to think what would happen if the dollar became worthless.  You couldn’t buy anything with that paper.  You’d be better off lighting a fire with it.  But Gold?  Gold is and always will be an in demand commodity.  No matter the value of the dollar, you can always trade gold!  So, as the economy tanks, more and more people begin buying gold.  They think of it as a sure-fire solid way to hold the value of their money as everybody else loses theirs.  If the economy tanks completely and the dollar becomes a fire starter, they’ll have something to buy stuff with.

So, worst case scenario, you’ve set yourself up and have something to trade.  But, much like the coins many of the gold hoarders buy, there’s a reverse side to this.  What if the economy recovers?  Those of you who are buying gold at $1100 and $1200 an ounce?  What happens when the economy comes back and the price of gold drops back down to something like $800 or $900?  Not so solid of an investment anymore, is it?

Now, let’s think on a grander scale.  There are an incredible number of people who are buying gold right now.  Celebrities everywhere are endorsing gold.  Regular joes like you and I are buying it up hoping to avoid the collapse of our economy.  And many of them will dump a large percentage of their investment portfolio into gold.  Maybe even their life savings.  If they lose 30% of their savings/portfolio, what do you think will happen?  The gold bubble will burst.  The price of gold will drop even further as people rush to sell off their holdings.  They’ll lose even more.

Is that the way it will go down?  Is Gold just another big bubble like the dot-coms and real estate?  I happen to think it might be.  I don’t think it will have nearly the effect that either of the previous bubble bursts had, but it could be a pretty rough few years while we recover.  What do you think?

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