Is Gold a Terrible Investment?

Gold can help diversify a portfolio and provides a safe haven in times of economic instability; however, it doesn’t offer much in terms of income generation.

Physical gold investment does not produce dividends and it can be difficult to store safely. Here are three reasons why investing in physical gold may be unwise.

1. It’s not a productive asset

Gold does not produce income and therefore is not considered productive assets. An equivalent investment made into productive economic activities such as businesses will produce greater returns over time and create real wealth for you and your future generations.

Gold investing does not pay any dividends, meaning any returns received won’t provide regular cash flows and this can be an obstacle to investors seeking steady income from their investments.

People often purchase gold as an insurance against inflation; however, its track record in this role hasn’t been particularly impressive. Gold returns have only ever outpaced stock market returns over very long time frames and it failed to keep pace with hyperinflation even at times when inflation was highest. Furthermore, one recent study demonstrated that investing in gold wasn’t any better than keeping an assortment of Beanie Babies or baseball cards as an inflation hedge.

2. It’s not a hedge against inflation

Gold can be an effective diversifier, but not an effective hedge against inflation. That’s because precious metal doesn’t produce any income and therefore loses purchasing power over time relative to inflation.

Gottlieb notes that gold’s performance over short time periods hasn’t been impressive and usually trails stocks and TIPS during inflationary periods. “Over a longer timeframe, a portfolio containing Treasury TIPS, stocks, and real estate provides more reliable protection from inflation,” according to Gottlieb.

Rose takes a different approach by studying real (inflation-adjusted) gold prices since 1970. He finds that in 1940 an ounce could purchase a tailored suit while today it doesn’t even cover socks – leading him to conclude that gold’s reputation as an inflation hedge may be exaggerated. “Gold may provide some security during times when prices and interest rates rise but holding too much exposure may prove hazardous,” according to him.

3. It’s not a safe haven

When investment experts refer to an asset as a “safe haven”, they mean it will maintain or even increase in value during challenging economic times. Gold is frequently seen as a reliable protection against inflation and other forms of financial turmoil.

Gold may appear like an effective hedge against inflation; however, as it is an intangible asset it does not offer direct protection from higher interest rates as its price decreases when interest rates increase.

So smart investors don’t just buy and sell gold based on short-term snapshots; they understand that gold should serve as a long-term store of wealth and therefore only constitute a minor portion of any portfolio. Due to its lack of diversification properties, investors should also diversify across multiple traditional investment classes when allocating capital towards gold investments.

4. It’s not a good diversifier

Gold investment may seem like an attractive way to diversify a portfolio, but in reality it may not be. Although its reputation has long been tied to holding value, gold has only shown significant gains during certain periods.

Investors who purchase gold may lose money over time if they hold on to it for an extended period. The reason? Gold’s standard deviation averages 19% – higher than many small-cap stocks!

Gold doesn’t provide you with income in the form of dividends or interest payments, and when investing physically you need to consider storage and insurance costs.

As such, it’s crucial that your allocation to gold remains within 5- or 10% of your overall portfolio. Instead, seek alternative investments that can provide a more stable and diversified exposure to resilient companies, helping you meet financial goals while safeguarding wealth. For assistance on building an ideal portfolio contact a Certified Financial Planner today.


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