Why is Gold a Dumb Investment?
Gold has long been seen as an effective hedge against inflation; however, its long-term inflation-adjusted returns have proven significantly less favorable than stocks or Treasury bills.
Physical gold purchases such as coins or bars come with their own set of disadvantages. First off, it can be hard to determine when gold is affordable; secondly, buyers depend on price increases to make any profit at all.
It’s a store of value
Gold fits this description and has often been considered a safe haven during times of financial instability, while also possessing low risk levels which make it attractive as an investment option for many individuals.
Physical gold may not be an appropriate investment due to its inability to generate income. When owning stocks or real estate investments instead, dividends help build wealth over time while mortgage payments help pay down debt while building equity over time.
Some investors view gold as a wise investment as its protective qualities have served it for over four millennia as a hedge against economic catastrophe or government collapse. Unfortunately, however, this argument relies on fear rather than rational thought.
It’s a commodity
Gold has long been used as both a store of value and medium of exchange; ancient Greeks, Romans, and Egyptians used it to exchange goods and services. Unfortunately, gold does not produce cash flow – when buying physical gold coins or bullion investors are simply gambling on future price movements rather than investing in an enterprise which may provide dividends and share buybacks.
Gold investing is not advised, and will not offer much protection from inflation or recession. Instead, investors should look for businesses with a proven record of increasing earnings – this will allow for reliable dividend payouts during tough times as well as providing higher returns than investing solely in physical gold would. Many renowned investors, like Warren Buffett, advise investing in cash-flowing businesses instead. By doing this, you’ll enjoy steady streams of income instead of only receiving limited returns through buying physical gold.
It’s a security
People invest in gold for various reasons, including diversifying their portfolios or to hedge against market volatility. Unfortunately, investing in physical gold requires safeguarding and insuring, adding an additional cost factor. Furthermore, any profit realized upon selling bars or coins must pay capital gains tax. For the investors themselves to make any gains at all through gold investing is dependent upon its price increasing; unlike if one owned a business producing more metal themselves – such as mining operations.
Gold can be difficult to time correctly when investing, making it hard to know when you should purchase it. Unfortunately, in the long term it has underperformed compared to treasury bills or stocks; according to one study quoted by The New York Times gold’s inflation-adjusted return from 1836 through 2011 was just 1.1% while both treasury bills and stocks provided returns of about 1.0% or 7.4% respectively.
It’s a hedge
Gold has long been heralded as an effective hedge against inflation. Because its price fluctuates in line with currency changes, each ounce becomes more costly as inflation impacts its purchasing power – an effective form of inflation hedging employed by many companies to offset rising jet fuel costs. Unfortunately, however, it does not come without risk and should only be used if done responsibly.
Gold prices experienced an unexpected boom during Russia’s invasion of Ukraine in early 2022, when inflation spiked dramatically; but this is an exception; most years, gold doesn’t serve as an effective inflation hedge.
One key reason is the unproductive nature of gold as an investment asset. Since it does not produce cash flows, its only source of profit comes from buyers paying more than they originally planned to for it – or investing it elsewhere instead of gold itself. Furthermore, money invested in gold does not contribute to economic growth like investments made into company shares would.