Why You Should Not Invest in Gold
Gold has long been considered an investment to safeguard against financial crises. Its value can notably increase during times of market instability, political unrest, high inflation or deficits.
Although gold can outshone stocks and bonds from time to time, its lack of income provides little reason for investment in the form. Therefore, gold should only form a small part of your overall portfolio.
1. It is a commodity
No matter if your investments in gold involve physical coins and bars or paper assets such as ETFs and mining stocks, this precious metal doesn’t yield any income; rather, it serves as both an inflation hedge and store of value.
Over the past decade, the SPDR Gold Shares ETF that tracks bullion prices returned an average annual return of just 5.1% compared to 11.9% for the S&P 500 index.
Though gold could surge during a crisis, many experts consider it too expensive to hold as long-term investment. Furthermore, too much exposure could rob you of earning high returns from other investments like stocks, bonds and mutual funds; therefore it’s wiser to limit exposure to gold to only 5-10% or 10% of your overall portfolio – this will allow for maximum wealth accumulation with minimal risk exposure.
2. It is a store of value
Gold’s popularity as a store of value derives from its status as a fungible commodity that can easily be exchanged for other commodities or cash, making it particularly appealing during times of economic instability, since its value won’t diminish like currencies and stocks would.
Gold has an extremely stable exchange value due to its rarity and finite supply. Furthermore, unlike other currencies which depreciate during periods of high inflation, gold does not lose value with inflation.
Though gold can serve as an effective currency alternative, it’s not recommended for long-term investment purposes. Under low inflationary environments, its real returns have generated negative real returns while stocks have returned 4.5% annually (Chart 1). Furthermore, investing in gold does not provide investors with dividend or interest payments so investing is more expensive than purchasing equity index funds or selling your equities to buy it instead.
3. It is a form of insurance
Gold has long been used as an asset class to diversify portfolios, but investors must remember not to rely too heavily on gold during times of market distress.
Gold can provide an effective hedge against inflation, as its price tends to move in an opposite way with that of the dollar. Furthermore, investing in gold may also serve to diversify currency risk for investors exposed to one country’s economy.
Keep in mind, however, that gold does not generate income or dividends, so any returns from investing are dependent upon selling for more than what was originally paid for. Physical gold can be expensive to store as well as being at risk of theft – all expenses which eat into potential returns. Therefore it is wise to carefully consider your time horizon before committing yourself to gold investment; typically only invest long term.
4. It is a risky investment
Gold investments do not generate dividends or income, making them risky investments for those looking for income-generating returns from their portfolios. Gold’s price can fluctuate and reduce its potential return.
Gold is an illiquid asset, meaning that investors cannot quickly sell it with just the click of a mouse. Investors in physical gold bars and coins must bear storage and insurance costs which eat into profits; similarly, investors in ETFs or shares must also cover brokerage fees to sell.
Although gold may be beneficial to your portfolio, making the decision should depend on your investing goals and time horizon. For instance, if your retirement goal is within a few years then more lucrative assets that provide higher long-term returns might be better investments – investing only a portion of your portfolio in gold could increase risk significantly.
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