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Should You Invest in Gold?

First and foremost, before answering this question about whether should you invest in gold, let’s examine what’s worth investing?

What’s worth investing?

If you read any of the book written by the famous financial guru, Robert T.Kiyosaki (stated in an interview with Jason Hartman in 2011 that he owns over 1400 units of apartment houses) you will be familiar with the term “assets” and “liabilities”. He said that asset is something that produce income and put money in your pocket regularly.

For example, your money in fixed deposit generate interest income every month. Therefore, you can call it an asset. How about owning a company shares? The company might declare dividend regularly, and you get a dividend income by owning its share. You can call it an asset. How about a property? It is an asset if you rent it out and get rental income every month. But if you are staying in it, Robert says that the property you are currently staying in is a liability. The logic is simple – if there is no income generated from the property, it is a liability.

Apparently, you would like to invest all your money into assets. Asset generates income so your money will grow.

Now by understanding what asset is about, according to Robert, who is currently the best financial educator most of us know, let’s examine gold as an asset class. Is gold consider an “asset”? Does it produce regular income?

Is Gold Considered an Asset because it has value?

Recently, I hosted an online training session, where I answered a bunch of questions submitted by my readers. During that session, I asked the live audience this question too. Can you consider gold as an “asset”? The response is a mixture of yes and no. About half of the audience said it is an asset. There rest said “no”. What about you?

You can watch the full webinar replay here (only for Premium Webinar Members)

One of my audience said that gold is an asset because it has “value”. Well, if you think deeper, everything has a value. If there is an old mobile phone being stored somewhere in your room, which is not used anymore, is it consider an asset too merely because it has value? You can sell the unused phone and convert it into cash. It definitely has value. But you can’t say that it is an asset, according to our understanding just now. We can’t qualify it as an asset because the used mobile phone doesn’t generate income.

Is Gold Considered an Asset because it appreciates in value?

Then, another audience replied that gold can be consider an asset because it appreciates in value. Well, what do you think about this now?

You can make money by buying gold because when you buy it at a low price, you might be able to sell it at a higher price. That converts into profit due to gold’s value appreciation over time. Is this true? Does gold always go up in price?

Now, I would like you to think about the reasons why something appreciates in value? It boils down to the concept of supply and demand. If there are more people demanding for a certain commodity, the seller can sell at a higher price.

Why is there a higher demand of certain things in this world? This drives up the price when there is not enough supply to cope with the market demand. Demand is high for certain resources when it is useful, producing income, but scarce. Gold appreciates in value whenever there is a higher demand of it.

Consider these two different things – a tenanted property versus gold. A well-located and well-maintained property in a highly populated town will always have demand for it. No doubt the property will appreciate in value because it is producing income. Tenants want the convenience of its location. Furthermore, all of us need a roof over our head.

Meanwhile, gold is still the same metal anywhere in the world. It might be scarce but it doesn’t produce income. Do you think the demand for it will always be there? Ask yourself honestly, can you live without gold? Can you carry on your daily life and live happily even if you don’t own any ounce of gold? I bet you can.

So, can you consider something as an “asset” just because it appreciates in value? I don’t think so.

Why is gold useful?

Gold might be useful as a currency insurance because people fear that currency depreciates whenever central banks print more money. That makes sense because if you want to store money somewhere (in a bank account, for instance), it might be better to store it as gold, or silver, or whatever commodities. As a currency insurance, gold can hedge against inflation, which technically means money depreciate in value.

Gold might be useful when you have to face doomsday. When countries go to war and currency is worthless, gold might become the medium of exchange like the old days. You can keep gold for these reasons.

But when it comes to investment, I would rather buy assets that generate incomes. Assets will always appreciate when it can generate incomes. It will appreciate even faster if the income generated from the same asset is higher and higher every year. As a summary, here is a well said comment from Jeffrey Cheah, a licensed professional estate planner:
“Gold has been a symbol of great value for ages. Over time it has been misinterpreted as an investment.”

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When it comes to investment, we should all listen to Warren Buffett, the Oracle of Omaha. He said,“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head”

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5 Comments

  • Edward Ng

    Reply Reply May 11, 2013

    Excellent explanation on this Gold Investment subject….keep it up

  • irin

    Reply Reply May 16, 2013

    good sharing of investment in gold. investment in gold is an emotional investment where investor is fear of currency depreciation.

  • Alif

    Reply Reply July 28, 2013

    Gold is for hedge against HYPER inflation. That is why one should allocate only to a maximum of 30% of their savings (or whatever surplus money that you have) to buy and keep (physical) gold/silver. When the economy is good, allocate 5% – 10% to buy silver/gold is good enough.

    Example:
    If 100% of your investment portfolio = RM500k (in terms of value or cash), then allocate 10% (RM50k) to buy (physical) gold/silver. The rest can be in property, shares, etc.

    It is not wise to think that all planets will always line up in a straight line. The purpose of portfolio diversification is not just about to gain maximum profit, but also to prepare for the worst so that you will not become poor when things gone bad. History proved that bad and good times have their own cycle. Therefore, one of your ‘investment portfolio must be in (physical) gold/silver.

    I do not think KC Lau only read books written by RK right? Come on, I know you are better that that.

    • KCLau

      Reply Reply July 28, 2013

      @Alif,

      You are exactly right. That’s the whole point of the video – if you diversify into gold, that is for the insurance against currency losing its value (hedge against hyper inflation). One should not treat gold as their most important investment and put all money there.

  • chin

    Reply Reply July 29, 2013

    Seeking some expert advice:

    I have invested in a total of 90g in gold but due to the recent drop in price, I will lose about 10% if I were to sell them off. Shall I cut loss now, or hold on or buy another 10g to make the minimum 100g limit for me to take out a physical gold bar?

    If I were to hold, how long would it be till I can break even or make profit?

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