Is Gold a Terrible Investment?
Gold is an unproductive asset that does not contribute to economic development, making it a poor long-term investment choice. Therefore, investors should only add it in small amounts with care.
Gold may make headlines when its price surges, but its long-term returns after inflation are quite dismal.
It’s a commodity
Gold has long been considered a commodity, and no one would dispute its status as such. However, investors should remember that while gold may serve as a diversifier in the past, it’s also expensive and does not generate income of its own. Furthermore, it can even depreciate due to inflation.
People weighing whether gold makes for an attractive investment often neglect its risks and costs of ownership. Storing, transporting and insuring it are complex processes which incur expenses; plus it does not produce income like stocks do.
Investors should carefully evaluate the pros and cons of owning gold depending on their investment goals and time horizon. Investors who need their investments to last decades should not hold gold due to price fluctuations that could cause loss of wealth over time. Instead, investors should opt for low-cost funds with fiduciary financial advisors as partners who can assist in meeting retirement goals.
It’s a store of value
Gold has often been promoted as an ideal store of value, yet this argument fails for several reasons. First off, gold doesn’t provide dividends and its price fluctuates too frequently to make an ideal short-term investment – that’s why gold should make up no more than 5% of your portfolio.
Gold should not be seen as a hedge against systemic risk. This is because its value does not depend on functioning economies and has only ever offered meager returns in return.
One study demonstrated that, when adjusted for inflation, gold has historically generated only 1.1% in annual returns – far lower than returns offered by long-term bonds and stocks. Plus, physical gold can be costly to store – quickly adding up in costs that become vulnerable to theft. If you want to protect your purchasing power instead, try investing in companies producing goods and services instead.
It’s a hedge against inflation
Gold may seem like an effective hedge against inflation, but that might not be the case. Though gold prices tend to increase with inflationary environments, their long-term inflation adjusted returns were just 1.1% according to Arnott’s study – far lower than returns from Treasury bills or stocks.
Investors who fear their purchasing power is declining may turn to gold as an investment asset; however, it should be remembered that gold doesn’t generate cash flow and should only represent part of an overall portfolio strategy.
Addition of gold to your portfolio can be beneficial, but beware the costs involved. Physical gold investments can be expensive to store securely; thankfully there are various ways available today for buying it such as mutual funds and exchange-traded funds.
It’s a safe haven
Gold has long been seen as a safe haven in times of economic turmoil, such as when stock markets decline. Many investors consider gold an inflation hedge – however the evidence doesn’t back this claim up; for instance, in one study conducted by Virginie Coudert and Helene Raymond they discovered that its performance as an economic recession hedge is rather disappointing.
Gold can perform well under certain conditions; however, its long-term returns when factoring in inflation are subpar. Treasury bills have given nearly 1% returns during that same time. Furthermore, physical gold storage can be costly and vulnerable to theft; to make your portfolio even safer you should diversify across different assets.