One of the most traditional alternatives to stock, bonds, and cash is gold. This commodity is considered a safe haven in troubled times, whether its economic distress or rampant inflation.

When you are investing in gold, you are making a bet that there will be a significant amount of demand for gold. Traditionally, demand for gold is jewelry, since that is the industry that uses the commodity the most. Besides jewelry, the main source of demand for gold is other investors looking for a safe haven.

The ironic thing about investor demand for gold is that it is entirely based on other investor demand. When it comes down to it, if people did not have the perception of gold as a ’safe haven,’ then the only demand for gold would be the jewelry business, hardly a recession proof industry.

There are several scenarios when people tend to want to hoard gold:

Inflation/Dollar Devaluation

Gold is a straight play against inflation. If the dollar is going down in value, then you might as well hold onto physical stuff, like gold. In this sense, the value in gold is that it is a commodity that doesn’t spoil. An ounce of gold will always be an ounce of gold. So if the dollar is dropping in value, it will take more dollars to buy gold. It’s as simple as that.

Recession

In frightening times, people want to hold onto a ‘physical asset.’ Gold makes people feel safe, since they know what they have is ‘real.’ The ironic thing about a recession is that since consumer demand for high priced items drops, the jewelry demand for gold drops significantly. Therefore, you are making a bet that other investors will want gold even more. In the long run you will need to sell this gold to someone. If you hold gold indefinitely, you will need dollar devaluation to make your bet good (the inverse has been the case so far with the 2008-2009 credit crisis). As you can probably tell, I’m pretty bearish on the idea of buying gold right now since the only demand for gold is from other investors. There is no ‘natural’ buyer.

How To Invest In Gold

You don’t need to own bricks of the shiny substance in your basement to own gold. The easiest way to own gold is to buy the gold ETF, GLD. I’d avoid buying into the infomercials that try to get you to buy physical gold coins. Attempting to resell those coins will prove difficult, so you’re paying high commissions per se. You can also invest in gold miners. The symbol for the gold miner ETF is GDX.