It's a bumpy ride in the sharemarket right now. Property is expensive and hard to buy with interest rates so high. With so much uncertainty people are wondering where to put their money. Cue the articles and books telling us of the riches to be made by investing in gold. Arm yourself with some background before you join the goldrush, though.

Picture a queue of suicidal rodents rushing up to enthusiastically nab the next ‘sure thing', a gold bar each. Moments later, clutching their prize, they plummet over the edge of the precipice to the chasm below. Splat.

There is a gold rush going on right now, fuelled by media and spruikers who are pandering to our fascination with this pretty, shiny metal.

Financially, it makes very little sense but that doesn't stop a huge proliferation of books being published this year on investing in gold, each banking on terms that glam-up the allegedly everlasting profits to be made from this "safe haven".

This isn't the first tsunami we've seen on the subject. The last time gold prices were up, in the late 70's and early ‘80s, magazines and books began extolling the wealth available in metals.

Witness, for example, author Howard Ruff's timeless work, "How to prosper during the coming bad years," (now available at Amazon for 35 cents), published at the height of the 1979 US energy crisis. This was a period of high oil prices, ‘stagflation', war, high sharemarket volatility, and a weak US dollar.

His thesis was basically that the only way to survive this uncertainty was to seek refuge in gold. That year the price of gold rose over 120% from US$208 to US$459 an ounce. Ruff spent a lot of time being interviewed for his opinions while gold continued to rise, peaking in January 1980 at $850 an ounce.

Unfortunately for followers of this advice, the price dropped like a gold bar, not reaching $850 an ounce until earlier this year, 28 years later.

This is hardly what we would call a good "store of value" or "inflation hedge".  If shares took 28 years to hit a previous high it would be a scandal great enough to drive many people away from the asset class permanently, but somehow this is seen as acceptable by "Goldbugs".

And yet it is with a growing sense of déjà vu that we see a weak US dollar, sharemarket volatility, the threat of war, and climbing oil prices. Turning to the bookstores we see Howard Ruff has released yet another book, "How to Prosper During the Coming Bad Years in the 21st Century". Interestingly it was published on April fool's day this year.

So why doesn't gold work as an investment?

An easy way to distinguish between an "investment" and a "speculation" is to ask whether that investment generates an expected return commensurate with risk.

For instance ...

• a habitable property produces rent,
• a functioning enterprise produces profits, and
• lenders expect to be paid interest.

Value is created on the expectation that those earnings will continue. However gold doesn't do or produce anything ... it's just a metal. Other than speculative guesswork there's no reason to expect that the price of gold will rise tomorrow, or ever.

Gold is instead moved by little more than supply and demand, there is no other objective way to value it and determine its true value.

Compare different investment assets and you quickly learn that some risks are worth taking more than others. The risks most worth taking are those that bring a reliable expectation of return. Taking a position on a price and hoping it will rise is not even speculating, it's called gambling.

[1] www.onlygold.com

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