Over the last decade, the price of gold has risen dramatically from less than $300 an ounce to over $1,600. This increase has occurred during a period when other asset classes such as real estate and stocks have experienced extreme price volatility, contrary to the common belief that these assets persistently produce steady growth in their value.
Savings accounts, certificates of deposit, bonds, and money market funds have fared little better in their ability to produce returns because of historically low interest rates. As a result, gold and other precious metals have attracted an enormous amount of attention and interest from people looking to put their money where they think it will generate the highest level of rewards.
The question that arises is whether buying gold is an investment or speculation. The answer requires a basic understanding of how investing and speculating are often misunderstood when they are mistakenly viewed as interchangeable concepts. They are distinctively dissimilar ways of evaluating financial opportunities, and although they share some common elements they are as different as going to college and visiting Las Vegas.
Investing generates a return on an asset during the time it is in the possession of the owner. Some examples of investing is purchasing stocks or bonds in a company, buying a home, or acquiring a stake in a small business. The key factor is in putting money into an asset that will generate a monetary rate of return in the form of interest, dividends, or profits; or by providing an ongoing tangible personal benefit in the case of a home.
Paying for specialized training or a college education is also a form of investing, as obtaining these credentials may enhance the income derived from a career resulting from the money, time, and energy put into the endeavor. An investment is a decision to participate in a stream of benefits for the owner, unless and until such time as this person chooses to divest.
Speculation, on the other hand, is the practice of buying an asset with the intention of selling it at some point in the future. In this sense, speculation is a bit of a guessing game as to what a particular item will sell for someday. Speculation is all about the expected sale price in relation to the current one. This makes speculating more about taking risk, rather than patiently building a steady accumulation of rewards through a stream of benefits. Speculation places its emphasis on determining a selling price in the future, while investing focuses on all the profit acquired along the way.
What does that make gold – an investment or a speculation? Well, gold generates no interest or dividends like stocks and bonds, nor any tangible benefit like a home. Gold does not have the potential to produce monthly or quarterly profits like a small business, and it does not enable a person to get a better paying career or higher pay in a current one.
Typically there are only two reasons why an individual would buy gold. The first is as a collector, much like those who collect art, musical instruments, and antiques, there are many who enjoy collecting numismatic coins and gold jewelry as a hobby. The second reason an individual would buy gold is with an intention of selling it for a price much higher than the purchase price. This second reason, judging by the enormous interest in gold exchange traded funds, the flood of television advertisements for companies specializing in buying and selling gold, and even street signs asking people to sell their gold jewelry, is why gold definitely falls under the category of speculation.