Gold (NYSEARCA:GLD), along with other precious metals, has historically been recognized as a sign of wealth - a store of value. Gold is rare, distributable, and durable - holding the traits desired for currency. While it had its place in history as a means of exchange and a store of value, this no longer seems to make sense in today's world where paper currencies are more cost effective and easy to transport while holding the remaining other traits desired for currency.
So where does gold stand in today's world?
There are several practical uses for gold. It is used as a conductor in many electronic devices (like cell phones, laptops, etc) and as fillings/crowns in dentistry. However, the utilitarian demand for gold is limited when compared to the total demand for gold. Here is a chart from the World Gold Council showing annual gold demand in tonnes:
According to the chart above, less than 10% of total gold demand comes from the Technology category, which is the only utilitarian/productive category in the chart. Roughly 56% goes to Jewellery, and the rest is held in investments and by central banks. In other words, less than 10% of annual gold demand goes toward productive applications while 90+% either become shiny personal ornaments or sit in a secured storage of some form.
What value supports gold's price?
It appears that gold is generally accepted as some sort of a safety blanket for value in the event of war, an economic collapse, or some other fear-inducing event. I suppose you can use a bar of gold in self-defense, but that might require some training. Jokes aside, whether nations are at war or at peace, in an economic boom or bust, gold is consistently and continuously unproductive. This tells me that people's perceptions is what supports the price of gold.
Here is Warren Buffett's comment on the utilitarian value of gold:
"Gold, however, has two significant shortcomings, being neither of much use nor procreative. True, gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end."
Sell your gold and buy a house or two
The argument here is not to invest in real estate specifically, but to invest in productive assets - assets that have utilitarian value.
For the sake of argument, let's buy a house. A house provides a person with a place to live, rest, work on hobbies, start a business, etc. There are many uses. Sure, in the event of a war, your investment in a house may not be secure - especially if the war takes place in our home country. However, nothing is secure in a time of war. Now, in the event of an economic collapse, you can still live in your house and rent out a room for someone else to live in (perhaps for less purchasing power). This is productive, and productive is valuable whether the economy is doing well or not.
Invest in something that produces something.
Having said all that, it is equally important to be price and risk sensitive. Overpaying for a house might make just as much sense as investing in gold.
Inflation protection alternatives
It is not uncommon for people to purchase gold with the intent of combatting inflation. Here are a couple of alternatives that may prove helpful:
S&P 500 index fund (NYSEARCA:SPY)
The S&P 500 index has historically remained ahead of inflation with the exception of few high inflation periods. However, over the long term (10+ years), the S&P 500 index has been a reputable combatant against inflation.
In an inflationary environment, rents and property values typically go up in currency terms. Additionally, REITs pay dividends, unlike gold.
Gold might be higher in 10 years or worthless in 10 years. It might even have a new productive use that we have not discovered yet. However, in today's world, gold is very good at being gold and not very good for much else. The prudent investor ought to invest in something that produces something.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.