Whether gold is a good bet or not, one thing is undeniable – it is a bet.  It is not an investment, it is a speculation.

So why is gold not an investment?  Gold is not like other investments. The main investment asset classes of cash, fixed income, shares and property have an income payment mechanism – interest, yield, dividends or rent. Gold has no in-built  income paying feature.  The sole factor that can alter the price of gold is a change in supply or demand. A gold bar has no way of paying an an income.  Absolutely None.  As a result the only constructive thing you can do with gold, once you own it, is sell it.  The price at the time of sale is determined solely by the laws of by supply and demand.  For as long as you own it, gold won’t pay you an income.  Those who put their money into gold are speculating that the price will rise.

What’s the worst that can happen?  History is littered with examples of speculations that have turned into bubbles. The Tulip bubble of 1637, the South Sea bubble of 1720 right up to the dot com bubble in the late 1990’s and the Spanish property bubble in 2006. In each case investors’ bought into assets that had no prospect of paying out income, speculating instead that asset prices would continue to increase.  However professional investors tend to demonstrate a bit more discipline.  They tend to sell out before the bubble burts.  The increase in the value of gold over the last 10 years makes it look a lot like a bubble.  But how will it burst?

Simple. Investors want a return.  If they invest in an asset that doesn’t provide a return they need to sell the asset and bank the profit. That’s their return.  When they sell there’s a temporary over supply.  If enough people sell at the same time this over supply will cause the price to fall. This fall in prices causes more speculators to sell, reducing prices further; this cycle is repeated until supply and demand reach equilibrium – usually at a much lower price – and the bubble is burst.

So is it worth speculating on gold? I don’t share the view of Cazenove Capital technical strategist, Robin Griffiths who stated that not owning gold was “a form of insanity”. My view is that there are certainly more prudent ways to invest your money.