Why You Should Not Invest in Gold
Gold can be an excellent asset to diversify returns and protect against inflation; however, any investment should be approached with care.
Direct investments like coins and bars require finding a safe place to store them, with additional insurance costs to consider. ETFs and mutual funds that invest in precious metals tend to be less costly and simpler to manage.
1. It’s Not a Safe Haven
Gold doesn’t really have many uses that match or surpass its supply, which leaves no way for its value to increase beyond what can be provided through mining operations. That means there’s no tangible source of income when investing in gold itself – something companies do. So investing is buying into their ability to produce something which makes you money; gold, on the other hand, doesn’t function this way. That is how you evaluate companies; not how gold should be evaluated.
But some investors use gold as an insurance against inflation. That’s because its price tends to remain stable during times of economic turmoil, plus its low correlations with other assets makes it an effective diversifier of your portfolio. Unfortunately, gold does not pay any dividends or interest so only allocate a small portion of your portfolio towards it for long-term holding as storage can incur premium costs and may not even provide as much safety.
2. It’s Not a Long-Term Investment
Gold has long been seen as a means to store value or hedge against inflation. While gold should form part of an overall well-diversified portfolio, no more than 5-10% should comprise its holdings.
Physical gold ownership comes with its own set of drawbacks, such as storage costs and its potential vulnerability to theft or destruction. Furthermore, holding physical gold doesn’t yield dividends or interest on an ongoing basis – unlike investing in shares which provide regular dividends or interest returns.
Owning physical gold requires hoping the price rises, unlike owning shares in a gold mining company that will generate profits from selling more gold even when prices remain flat or decline, increasing transparency for investors who prefer alternative investments such as ETFs.
3. It’s Not a Tax-Free Investment
Gold investment may not be appropriate for everyone; before making the decision to add gold to your portfolio, take into account your goals, timeline and risk tolerance.
Gold can add diversification and can help hedge against inflation; however, it does not produce income and therefore must pay capital gains taxes upon sale. Furthermore, physical gold does not qualify for tax-exemption; therefore you must pay capital gains taxes upon its sale.
Gold has long been considered an economic haven during times of financial unease, demonstrating its resilience over time by rising in price during times of high market volatility and economic stress, making it a popular alternative investment in geopolitical crises. However, performance may depend heavily upon timeframe; short-term results could see its correlation with stocks decline significantly and limit any upside potential that exists for this investment vehicle.
4. It’s Not an Inflation Hedge
Gold has long been seen as an economic sanctuary. Even with its volatility, investors often use it as a diversifier in portfolios since it offers returns, liquidity and low correlations with stocks or bonds; moreover, unlike bank savings accounts or stocks of companies that may fail, it has no counterparty risk associated with it.
Gold has historically provided roughly equivalent returns over long timescales – decades or centuries – as global economic output. However, over shorter timescales gold has failed to protect purchasing power against inflation.
Moneycontrol’s research indicates that investing in gold to hedge against inflation should take the timing of your purchase into consideration. Moneycontrol suggests the lowest prices come in January or late December before prices increase in February; for optimal buying times early March/April and mid-June to July are the ideal times.