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Ask the expert: Is gold safer than CDs and money market accounts?

| MoneyRates.com Senior Financial Analyst, CFA
min read

Q: Between the financial crisis a few years ago and all the talk about the dollar falling now, I'm getting nervous about my bank accounts. I have some money market accounts and CDs, but I'm wondering if there is a safer place for my money -- perhaps gold?

A: The difficulties of the past few years haven't just raised concerns about jobs and economic growth the way recessions usually do -- they've made people worry about the basic stability of the financial system. Some nervousness is understandable, but before you cash in your money market accounts and CDs, there are a couple things to bear in mind:

  • Your deposits should be safe as long as you are within FDIC insurance limits. The limit is generally $250,000 per depositor per bank, but if you can get more coverage by diversifying among banks, or if some of your deposits are in joint accounts or IRAs. If things got to the point of collapse where the US government could no longer fulfill its responsibilities to depositors, it's hard to see an alternative that would be safe anyway.
  • Gold is hardly the safe harbor people take it for. Certainly, gold is a radically different investment than deposit accounts, so it shouldn't really be considered as a safe alternative. Gold can fluctuate widely in value, and it pays no interest. Gold has been hot for several years now, which should make you wary about jumping in at current prices. Even if gold just flattens out, without income it becomes dead money, losing ground to inflation. With the best money market rates above 1.5 percent, and the best CD rates around 3 percent if you are willing to go long, you could do better by sticking with deposit accounts.

In short, if you are worried about the financial system and the economy, FDIC-insured deposits are probably the safest place for your money.

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Antti-Juhani Kaijanaho 19 October 2010 at 2:46 pm

The long-term (nominal) return of gold isn't zero, and gold isn't likely to lose ground to inflation, in the long run.

First, we must remember what inflation is: it is caused, in the long run, by the expansion of the amount of money in the system.

Gold, as an investment good, is a substitute for money, essentially another currency. Thus, its value in money, in the long run, is determined by the relative changes of the amount of investment gold in the market and the amount of money in the system.

Eventually, we will see world gold production to decline to insignificant levels. At that point, the investment gold pool will likely stay roughly constant, and thus its price in money should, in the long run, follow monetary inflation and thus, again in the long run, protect from inflation.

Thus, I believe gold provides, in the very long run, a 0 % real return, and a nominal return corresponding to the rate of inflation.

In the short run, buying gold is speculative. The best use I can think for it in the short to medium run is as a hedge against hyperinflation: If the predominant money hyperinflates (which is possible but not particularly likely), physically possessed gold is likely to be a very good store of value, and also be useful for paying for goods and services. Gold-derived securities are likely to be mostly useless in that scenario, as you won't be able to access and trade them.

Hoody 19 October 2010 at 1:44 pm

My sentiment too. I'm not into gold or stocks never have been.

I just go "bigger" on CD's with the rates lower, I won't go long either for 3%, 5% is my limit for long term 5 years or more.

This gold thing will run its course also, it always does. I'll still be getting my interest.

Life goes on with or without you!