Is Gold a Terrible Investment?
Gold has long been revered and esteemed as an asset class since ancient times as a store of value, an inflation hedge and safe haven during bear markets. But is it an appropriate investment choice today?
Warren Buffett has one major complaint against gold, specifically because it doesn’t generate income – no dividend payments, interest payments or storage costs apply – which he sees as counterintuitive to its investment potential.
It’s not a hedge against inflation
Gold has long been valued as a store of value and currency, and some investors hope it can protect their purchasing power against inflation. Unfortunately, however, its track record is mixed at best.
Gold earned an average return of 35% during 1973 to 1979 when U.S. inflation rates were high; this doesn’t prove that higher inflation caused demand to surge for this precious metal, however; instead it may have been determined by factors like supply considerations or trading trends on futures markets.
Gold’s effectiveness as an inflation hedge is diminished further by its status as an income-generating asset; investors must bear storage and security costs, without receiving dividends or interest on their gold holdings. That explains why Warren Buffett doesn’t own any gold himself; investing in it therefore seems unwise.
It’s not a long-term investment
Gold can garner considerable interest when prices surge, but it isn’t an ideal long-term investment. According to research presented in The New York Times, over three decades, its long-term returns were terrible even after factoring inflation; by comparison, stocks and Treasury bills provided positive real returns over this same time frame.
Gold is not an investment with growth potential and does not produce income; instead, it costs money to store. Because of this, it is essential to take an in-depth assessment of your risk tolerance and financial goals before investing anything.
Many investors view gold as an effective hedge against inflation, yet its effectiveness cannot compare to that of investing in stocks and bonds over the long term. Furthermore, global events often influence gold prices making long-term planning for this investment imperative.
It’s not a safe investment
Many people mistakenly believe gold to be an investment with little risk because it’s tangible and can be stored safely, but upon further inspection its history doesn’t bear out this belief; gold has not proven reliable as an asset class since its introduction as an asset class; nor has it provided any significant hedge against inflation, nor generated interest or dividends for owners over time.
Gold should be used as part of a diversified portfolio asset, due to its highly volatile price and uneven track record in protecting against inflation over the last three years. As it does not generate any income for investors, investors must carefully consider their time horizon to avoid falling gold prices; in general no more than 10% of an asset portfolio should comprise gold; the remaining pieces should consist mainly of equity-based assets that offer steady returns over time.
It’s not a growth investment
Gold does not produce income, making it ineligible as an investment vehicle that produces growth. Contrast this with stocks which pay dividends or carry surplus cash balances that make them better growth investments. While this might not seem significant when making investment decisions, this factor must be kept in mind.
People sometimes rely on gold as an inflation hedge or way to diversify their portfolio, yet over long time periods gold has underperformed relative to the wider market – most recently during inflationary conditions in recent years, it actually generated negative real returns!
Physical gold ownership entails costs that go beyond storage fees and security risks; theft risk also exists, while more gold is being mined every year, leading to an increased supply and resulting in lower prices.