Written by Kevin Parker
Some tech stocks appear to be golden investment opportunities for the Wall Street novice and even the professional trader. However, this is only the case under certain circumstances. The timing and type of investment are equally important. Common knowledge dictates to “buy low and sell high” to profit — which is not necessarily the case with gold.
While tech stocks have been a consistent moneymaker for investors for nearly 20 years, precious metals like gold had been legal tender and fiat currency valuators for more than 20 centuries. The Bretton Woods agreements in 1944, along with President Richard Nixon ending the gold standard for the U.S. dollar in 1971, eliminated free market fluctuations of gold’s value. Since then gold, along with the power to set its value, ended up in the hands of central bankers. Thus, the best way to determine if you should invest in the dot com du jour or gold comes down to policies implemented by the central banks, mainly the Federal Reserve, IMF and European Central Bank.
Invest in Physical Gold
Gold stocks provide you a piece of paper saying you own a certain amount of the shiny metal, but there’s nothing like owning the actual treasure itself. Companies such as US Money Reserve and even local dealers sell the actual gold bars and coins, sometimes at less than market value. Owning and possessing the actual metal gives you a tangible long-term investment that can be passed on to your children and grandchildren.
Again, you can purchase tech stock, but the goods and services that make the stocks soar (think iPhone 5) become obsolete when the next big thing comes along. Tech stocks, like all investments on paper, are subject to the ups and downs of Wall Street and demand for their corresponding products. The drawbacks to owning actual gold are safety and storage. Most people use safe deposit boxes, while others build small underground safes in their homes.
Gold’s Eternal Value
The Gramm-Leach-Bliley Act of 1999 was the first step in total bank deregulation and allowed for commercial and investment institutions to merge into single entities. The Federal Reserve subsequently relaxed lending policies and printed more money, creating a housing market that accommodated any and all credit situations. Of course, the artificial housing bubble burst in 2007, leaving the $250,000 house you bought in 2002 worth only $90,000 five years later. At the same time, an ounce of gold that cost about $300 in 2002 rose to well over $900 by 2007. This is not because gold became more valuable, but rather the currency (dollar) was debased due to inflation, so it simply cost more dollars to buy an ounce of gold. Inflation is also part of the reason there is no exact positive correlation between the price of tech stocks and gold, as the previous is a speculative bet with no intrinsic value, and the latter is a tangible commodity subject to price manipulation (see also food and clothing prices). Though history shows gold’s value can decrease during times of economic distress, the recent centralization of all the world’s currencies and controversy surrounding Fort Knox and its gold reserves, have tied the value of gold almost exclusively to central bank policies.
This same sort of policy watching also benefits tech-stock buyers. Apple recently became the world’s most valuable company at $623.5 billion; more than Exxon Mobil. Speculators try and get the inside scoop on when Apple will release the new iPad or iPhone, knowing stock prices will simultaneously soar. The difference is that there will be an iPhone 6 eventually, rendering the iPhone 5 an artifact. Gold purchased in 1920 will have the same value as gold purchased today and its value will fluctuate based on global monetary policy.
Gold is a relatively stable, low-risk commodity, while tech stocks can have extreme fluctuations. Diversification is the best way to protect your wealth and potentially enjoy occasional gains. Tech stocks and other higher-risk commodities should make up a majority of your portfolio if you’re goal is to make money in the short term. Gold offers you an aesthetically pleasing metal that retains its value based on human fascination with the precious metal.