Is gold really an investment or just a hedge against inflation?
The problem I have with gold is that it's only worth what someone will pay you for it.  To a degree that's true with any equity, but with a company there are other capital resources etc that provide a base value for the company, and generally a business model that generates income. Gold just sits there. it doesn't make products, it doesn't perform services, you can't eat it, and the main people making money off of it are the folks charging a not insubstantial commission to sell it to you, or buy it back.  Sure it's used in small quantities for things like plating electrical contacts, dental work, shielding etc. But Industrial uses account for only 10% of consumption.  Mostly it's just hoarded, either in the form of Jewelry (50%) or 'investment' (bullion/coins) 40%.  Its value derives largely from rarity and other than the last few years, there's no track record of steady growth over time like the stock market or real-estate. Just look at what gold prices did between 10 to 30 years ago, I'm not sure it came anywhere near close to keeping pace with inflation during that time.  If you look at the chart, you see a steady price until the US went off the gold standard in 1971, and rules regarding ownership and trading of gold were relaxed.  There was a brief run up for a few years after that as the market 'found its level' as it were, and you really need to look from about 74 forward (which it experienced its first 'test' and demonstration of a 'supporting' price around 400/oz inflation adjusted.  Then the price fluctuated largely between 800 to 400 per ounce (adjusted for inflation) for the next 30 years. (Other than a brief sympathetic 'Silver Tuesday' spike due to the Hunt Brothers manipulation of silver prices in 1980.)  Not sure if there is any causality, but it is interesting to note that the recent 'runup' in price starts in 2000 at almost the same time the last country (the Swiss) went off the 'gold standard' and gold was no longer tied to any currency (or vise versa)   If you bought in '75 as a hedge against inflation, you were DOWN, as much as 50% during much of the next 33 years.  If you managed to buy at a 'low' the couple of times that gold was going down and found support around 400/oz (adjusted) then you were on average up slightly as much as a little over 50% (throwing out silver Tuesday) but then from about '98 through '05 had barely broken even.  I personally view 'investments' in gold at this time as a speculation.  Look at the history below, and ask yourself if buying today would more likely end up as buying in 1972  or 1975? (or gods forbid, 1980)  Would you be taking advantage of a buying opportunity, or piling onto a bubble and end up buying at the high?  Note from Joe - The article Demand and Supply adds to the discussion, and supports Chuck's answer. Gold is a commodity.  It has a tracked price and can be bought and sold as such.  In its physical form it represents something real of signifigant value that can be traded for currency or barted.  A single pound of gold is worth about 27000 dollars. It is very valuable and it is easily transported as opposed to a car which loses value while you transport it.  There are other metals that also hold value (Platinum, Silver, Copper, etc) as well as other commodities.  Platinum has a higher Value to weight ratio than gold but there is less of a global quantity and the demand is not as high.  A gold mine is an investement where you hope to take out more in gold than it cost to get it out.   Just like any other business.  High gold prices simply lower your break even point. TIPS protects you from inflation but does not protect you from devaluation.  It also only pays the inflation rate recoginized by the Treasury.  There are experts who believe that the fed has understated inflation.  If these are correct then TIPS is not protecting its investors from inflation as promised.   You can also think of treasury bonds as an investment in your government.  Your return will be effectively determined by how they run their business of governing.  If you believe that the government is doing the right things to help promote the economy then investing in their bonds will help them to be able to continue to do so.  And if consumers buy the bonds then the treasury does not have to buy any more of its own. Another answer to this question occurred to me as I started learning more about historical uses for gold etc.  Perhaps it's a crackpot idea, but I'm going to float it anyway to see what you folks think. Investing in Gold is an indirect investment in the Economy and GDP of the nation of India.  To that extent is it only a hedge against inflation, so long as the indian economy grows at a more rapid rate than your local inflation rate.  Fact, India currently consumes more than 1/3 of gold production, predominantly in the form of Jewelry. And their demand has been growing rapidly, up 69% just between 2009 and 2010 alone. I can't find too many historial consumption numbers for India, but when you look at past articles on this subject, you see phrases like 'one forth' and '20%' being used only a few years go to describe India's consumption levels. Fact, India has virtually no domestic sources of gold.  India’s handful of gold mines produce about 2.5 tonnes of the metal each year, a fraction of the country’s annual consumption of about 800 tonnes. Fact. Indian Culture places high value on gold as a visible demonstration of wealth.  Particularly in situations such In Indian weddings where the bride brings in gold to show her family's status and wealth and it forms part of the dowry given to bride. It is believed that a bride wearing 24k gold on their wedding to bring luck and happiness throughout the married life. Fact, the recent trends in outsourcing, Indian citizens working abroad sending money home, etc have all lead to a influx of foreign cash to the Indian economy and explosive GDP growth. See the following chart and compare the period of 2000-current with a chart showing the price of gold in other answer here.  Notice how the curves parallel each other to a large degree  Potentially unfounded conclusion drawn from above numbers.  The rapid growth of the Indian economy, coupled with a rich cultural tradition that values gold as a symbol of wealth, along with a sudden rise in 'wealthy' people due to the economy and influx of foreign cash, has resulted in skyrocketing demand for gold from India, and this large 'consumption' demand is the most likely explanation for the sudden rise in the price of gold over the last several years.  Investors then jump on the 'rising price bandwagon' as especially does anyone that can make a profit from selling gold to those seeking to get on said bandwagon. As such, as long as indian cultural tradition remains unchanged, and their economy remains strong, the resulting increasing demand for gold will sustain current and perhaps increased prices.  Should there be any sudden collapse in the Indian GDP, gold will likely tumble in parallel. disclaimer: not an expert, just observations based off the data I've seen, there may be other parts to the picture of 'gold demand' that I've not considered. "Over on Quantitative Finance Stack Exchange, I asked and answered a more technical and broader version of this question, Should the average investor hold commodities as part of a broadly diversified portfolio?  In short, I believe the answer to your question is that gold is neither an investment nor a hedge against inflation. Although many studies claim that commodities (such as gold) do offer some diversification benefit, the most credible academic study I have seen to date, Should Investors Include Commodities in Their Portfolios After All? New Evidence, shows that a mean-variance investor would not want to allocate any of their portfolio to commodities (this would include gold, presumably). Nevertheless, many asset managers, such as PIMCO, offer funds that are marketed as ""real return"" or ""inflation-managed"" and include commodities (including gold) in their portfolios.  PIMCO has also commissioned some research, Strategic Asset Allocation and Commodities, claiming that holding some commodities offers both diversification and inflation hedging benefits." "Gold is not an investment.  Gold is a form of money.  It and silver have been used as money much longer than paper.  Paper money is a relatively recent invention (less than 350 years old) with a horrible track record of preserving wealth.  When I exchange my paper US dollars for gold I'm exchanging one form of money for another.  US dollars, or US Federal Reserve Notes to be more precise, can be printed ad nauseam by one bank that is totally private and is never audited.  Keeping all of your savings in US dollars is ignoring history, it is believing the US Federal Reserve has your best interest in mind, it is hoping that somehow things will be different this time, it is believing that the US dollar will somehow magically be the first fiat currency to last a person's lifetime. TIPS may seem like a good hedge against inflation.  However, the government offering TIPS is also the same government that is calculating the inflation rate used to adjust TIPS.  What a great deal.  If you do some research you discover that the method for calculating the consumer price index is always ""modified"" since it is always found to over estimate inflation.  It is never found to under estimate inflation.  Imagine that.  Here is a chart showing the inflation rate as if it were calculated the same way as it was calculated in 1980. Buying any government debt is also a way to guarantee you or your children will be taxed in the future since the government will have to obtain the money from someone to pay back bonds.  It's like voting for future taxes." From Wikipedia: Investment has different meanings in finance and economics. In Finance   investment is putting money into something with the expectation of   gain, that upon thorough analysis, has a high degree of security for   the principal amount, as well as security of return, within an   expected period of time. In contrast putting money into something with   an expectation of gain without thorough analysis, without security of   principal, and without security of return is speculation or gambling. The second part of the question can be addressed by analyzing the change in gold price vs inflation year by year over the long term. As Chuck mentioned, there are periods in which it didn't exceed inflation. More important, over any sufficiently long length of time the US stock market will outperform. Those who bought at the '87 peak aren't doing too bad, yet those who bought in the last gold bubble haven't kept up with inflation. $850 put into gold at the '80 top would inflate today to $2220 per the inflation calculator. You can find with a bit of charting some periods where gold outpaced inflation, and some where it missed. Back to the definition of investment. I think gold fits speculation far better than it does investment. I've heard the word used in ways I'd disagree with, spend what you will on the shoes, but no, they aren't an investment, I tell my wife. The treadmill purchase may improve my health, and people may use the word colloquially, but it's not an investment. "Over time, gold has mainly a hedge against inflation, based on its scarcity value. That is, unless finds some ""killer app"" for it that would also make it a good investment. The ""usual"" ones, metallurgical, electronic, medicine, dental, don't really do the trick. It should be noted that gold performs its inflation hedge function over a long period of time, say $50-$100 years.  Over shorter periods of time, it will spike for other reasons. The latest classic example was in 1979-80, and the main reason, in my opinion, was the Iranian hostage crisis (inflation was secondary.) This was a POLITICAL risk situation, but one that was not unwarranted. An attack on 52 U.S. hostages (diplomats, no less), was potenially an attack on the U.S. dollar. But gold got so pricey that it lost its ""inflation hedge"" function for some two decades (until about 2000). Inflation has not been a notable factor in 2011. But Mideastern political risk has been. Witness Egypt, Libya, and potentially Syria and other countries. Put another way, gold is less of an investment that a ""hedge."" And not just against inflation."
If you want a concrete investment tip, precious metals (e.g. gold, silver) are on a pretty good run these days, personally I still think they have ways to go as there are just too many problems with modern monetary policy of an almost existential nature, and gold and silver are better stores of value than fiat money. Silver is particularly hot right now, but keep in mind that the increased volatility means increased risk. If the Fed keeps its foot on the pedals of the dollar printing press and we get QE3 this summer, that will most likely mean more people piling into the PMs to hedge against inflation. If the Fed starts to tighten it's policy then that's probably bad news for both equities and bonds and so PMs could be seen as a safe haven investment. These are the main reasons why PMs take up a good portion of my portfolio and will continue to do so untill I see how the global economy plays out over the next couple of years. I think your premise is slightly flawed. Every investment can add or reduce risk, depending on how it's used. If your ordering above is intended to represent the probability you will lose your principal, then it's roughly right, with caveats. If you buy a long-term government bond and interest rates increase while you're holding it, its value will decrease on the secondary markets. If you need/want to sell it before maturity, you may not recover your principal, and if you hold it, you will probably be subject to erosion of value due to inflation (inflation and interest rates are correlated). Over the short-term, the stock market can be very volatile, and you can suffer large paper losses. But over the long-term (decades), the stock market has beaten inflation. But this is true in aggregate, so, if you want to decrease equity risk, you need to invest in a very diversified portfolio (index mutual funds) and hold the portfolio for a long time. With a strategy like this, the stock market is not that risky over time. Derivatives, if used for their original purpose, can actually reduce volatility (and therefore risk) by reducing both the upside and downside of your other investments. For example, if you sell covered calls on your equity investments, you get an income stream as long as the underlying equities have a value that stays below the strike price. The cost to you is that you are forced to sell the equity at the strike price if its value increases above that. The person on the other side of that transaction loses the price of the call if the equity price doesn't go up, but gets a benefit if it does. In the commodity markets, Southwest Airlines used derivatives (options to buy at a fixed price in the future) on fuel to hedge against increases in fuel prices for years. This way, they added predictability to their cost structure and were able to beat the competition when fuel prices rose. Even had fuel prices dropped to zero, their exposure was limited to the pre-negotiated price of the fuel, which they'd already planned for. On the other hand, if you start doing things like selling uncovered calls, you expose yourself to potentially infinite losses, since there are no caps on how high the price of a stock can go. So it's not possible to say that derivatives as a class of investment are risky per se, because they can be used to reduce risk. I would take hedge funds, as a class, out of your list. You can't generally invest in those unless you have quite a lot of money, and they use strategies that vary widely, many of which are quite risky. "Platinum use is pretty heavily overweight in industrial areas; according to the linked Wikipedia article, 239 tonnes of platinum was sold in 2006, of which 130 tonnes went to vehicles emissions control devices and another 13.3 tonnes to electronics. Gold sees substantial use as an investment as well as to hedge against economical decline and inflation, with comparatively little industrial (""real world"", as some put it) use. That is their principal difference from an investment point of view. According to Wikipedia's article on platinum, ... during periods of economic uncertainty, the price of platinum tends to decrease due to reduced industrial demand, falling below the price of gold. Gold prices are more stable in slow economic times, as gold is considered a safe haven and gold demand is not driven by industrial uses. If your investment scenario is a tanking world economy, for reason of its large industrial usage, I for one would not count on platinum to not fall in price. Of course gold may fall in price as well, but since it is not primarily an industrial use commodity, I would personally expect gold to do better in such a scenario." "This type of structured product is called a capital protection product.  It's like an insurance product - where you give up some upside for protection against losses in certain cases.   From the bank's perspective they take your investment, treat it as an ""interest-free loan"" and buy derivatives (like options) that give them an expected return greater then  They make their money: With this product, you are giving up some potential upside in order to protect against losses (other than catastrophic losses if the lower index drops by 50% or more).   What's the catch? There's not really a catch. It's a lot like insurance, you might come out ahead (e.g. if the market goes down less than 50%), but you might also give up some upside.  The bank will sell enough of these in various flavors to reduce their risk overall (losses in your product will be covered by gains in another). Note that this product won't necessarily sell for $1,000. You might have to pay $1,100 (or $1,005, or whatever the bank can get people to buy them for) for each note whenever it's released.  That's where the gain or loss comes into play.  If you pay $1,100 but only get $1,000 back because the index didn't go up (or went down) you'd have a net loss of $100. It's subtle, but it is in the prospectus: The estimated value of the notes is only an estimate determined by reference to several factors.  The original issue price of the notes will    exceed the estimated value of the notes because costs associated with selling, structuring and hedging the notes are included in the original issue price of the notes.  These costs include the selling commissions, the projected profits, if any, that our affiliates expect to realize for assuming risks inherent in hedging our obligations under the notes and the estimated cost of hedging our obligations under the notes." The article fails to mention that if Paul has invested like this since the 1970s, in keeping with his long-held economic views, then he'd have lost in a big way. The gold bugs of the 70s got killed over the following two decades. "Platinum use is pretty heavily overweight in industrial areas; according to the linked Wikipedia article, 239 tonnes of platinum was sold in 2006, of which 130 tonnes went to vehicles emissions control devices and another 13.3 tonnes to electronics. Gold sees substantial use as an investment as well as to hedge against economical decline and inflation, with comparatively little industrial (""real world"", as some put it) use. That is their principal difference from an investment point of view. According to Wikipedia's article on platinum, ... during periods of economic uncertainty, the price of platinum tends to decrease due to reduced industrial demand, falling below the price of gold. Gold prices are more stable in slow economic times, as gold is considered a safe haven and gold demand is not driven by industrial uses. If your investment scenario is a tanking world economy, for reason of its large industrial usage, I for one would not count on platinum to not fall in price. Of course gold may fall in price as well, but since it is not primarily an industrial use commodity, I would personally expect gold to do better in such a scenario." "The reason I don't want to get into here it is because internet debates over these things turn into an absolute shit-show, instantly.   In a nutshell, the (sane parts of) argument comes down to very difficult-to-prove assumptions about how perfectly fiat currency can/will be implemented.  - The (sane) case for gold is that it is very difficult to get into the kind of money-printing mischief that places like Zimbabwe and Argentina have got into when your currency is based on something with a finite and slow-growing supply. It's hard to print more gold.   - The (sane) case for fiat currency is that it is ridiculous to hamstring the entire economy by tying it to one arbitrary commodity with a fluctuating value and supply that does not correlate well with overall economic output.   A perfectly-implemented fiat currency, printed and ordained by a perfectly omniscient, perfectly competent, and perfectly benevolent central bank (let's call it ""God money""), is the ideal. That's pretty much axiomatic, and even sane gold-bugs would tend to allow the above, so far as it goes, including all stipulations.   In fact, someone inclined to believe in divine intervention might make a case that gold is precisely that: a hard-to-forge, easy-to-detect, easy-to-handle metal placed on earth by God in quantities just right to serve as currency.  The problem is that a really *bad* fiat currency is absolutely terrible: leads to nightmare-scenarios; people starving on one side of a fence while tons of crops are being burned on the other side because of runaway price-discrepancies, stuff like that. Again, even (sane) Keynesians will allow as much.   The problem is that the crazies, ideologues, and single-issue zealots come out of the woodwork when you start getting into this stuff, and tend to dominate the conversation (if ""conversation"" is a fair word to use). In a sense, the ""sane"" spectrum of debate boils down to an almost ideological divide:   - Whether you believe that a sort of permanent, technocratic, central-bank/currency-issuer is possible/plausible.  Because if it *is* achievable, it is almost certainly better than just tying the whole economy to the price of a single commodity. If it is *not* achievable, then it is almost certainly better to let the markets adjust and correct, however imperfectly, than to tie the whole economy to the whims and wishes of incompetent and politically-motivated money-printers. (I hope that makes sense, and that it is a fair representation of the conundrum).  The problem with making an argument is that you've got a hodge-podge of technical (and sometimes fairly complicated) nitty-gritty, plus a certain amount of starting-assumption/worldview/ideological stuff, all smooshed together, and almost all of it is very hard/impossible to ""prove"" via evidential scientific testing.   Both the technical and historical stuff have strong conflicting indicators, and it's obviously not possible to, say, set up two identical societies and let them run for a thousand years, controlling for everything but monetary policy, and see what happens.   Macro-economics is a very imperfect science. It has certainly given the world some very useful and valuable insights and axioms, but the testing methods are extremely indirect and heavily subject to interpretation: you really have only the historical record to draw on, and it is almost impossible to find examples that control for whatever variable is in question.   Macro, ideally, *tries* really hard to be science, but you're always kind of picking from bad examples when testing a hypothesis, trying to line up vaguely similar historical periods to isolate for some common factor. It's kind of like geology or theoretical physics, except with much smaller and messier data-sets. Ten thousand years from now, it will be much easier to look at the historical data and isolate for particular variables over multiple hundred-year spans across a variety of cultural, political, and socio-economic backgrounds.   For now, the peanut-gallery is chock full of questions that the experts cannot answer, and the record is full of exceptions to every rule, and a lot of it frankly boils down to worldview and ideology (with a healthy dollop of ""I'm smarter than you"" to finish the sauce).   Since I personally prefer technical questions to politics, I will leave it to others to formulate and debate those things." "Debt is nominal, which means when inflation happens, the value of the money owed goes down.  This is great for the borrower and bad for the lender. ""Investing"" can mean a lot of different things.  Frequently it is used to describe buying common stock, which is an ownership claim on a company.  A company is not a nominally fixed asset, by which I mean if there was a bunch of inflation and nothing else happened (i.e., the inflation was not the cause or result of some other economic change) then the nominal value of the company will go up along with the prices of other things. Based on the above, I'd say you are incorrect to treat debt and investment returns the same way with respect to inflation.  When we say equity returns 9%, we mean it returns a real 7% plus 2% inflation or whatever.  If the rate of inflation increased to 10% and nothing else happened in the economy, the same equity would be expected to return 17%.  In fact, the company's (nominally fixed) debts would be worth less, increasing the real value of the company at the expense of their debt-holders. On the other hand, if we entered a period of high inflation, your debt liability would go way down and you would have benefited greatly from borrowing and investing at the same time.   If you are expecting inflation in the abstract sense, then borrowing and investing in common stock is a great idea. Inflation is frequently the result (or cause) of a period of economic trouble, so please be aware that the above makes sense if we treat inflation as the only thing that changed.  If inflation came about because OPEC makes oil crazy expensive, millennials just stop working, all of our factories got bombed to hades, or trade wars have shut down international commerce, then the value of stocks would most definitely be affected.  In that case it's not really ""inflation"" that affected the stock returns, though."