Do I invest in gold? I get asked this question from time to time. My answer is always the same. NO. Inevitably, I then get asked why I do not. I usually answer by asking a question myself. What is gold used for that makes it so valuable? Think about it for a minute. I hope to convince you why investing in gold is not a wise decision.
Besides jewelry what do individuals do with gold? Sure, gold has properties that make it excellent for electronics and other manufacturing purposes. Manufactures, however, don’t use much of it in electronic products because it’s so expensive. Instead, they use other metals that have similar properties while costing a fraction of the price.
So, why do we hear so much in the news about the benefits of gold? It’s because people have tried to sell these shiny metals since the dawn of civilization. Gold is not an inflation hedge but a “crisis hedge”, as it is only in time of crisis when we see a spike in gold. It is very difficult to anticipate an upcoming crisis. If we could see one coming, it probably wouldn’t happen since there would probably be attempts to thwart it. Very few saw the Great Recession coming.
There is no logical way to value gold. Gold is not a stock or bond. It does not pay a dividend, offer any type of earnings, or earn any interest. I can’t look at the P/E to determine what the value should be. Instead, it is considered a store of value, which is an alternative to currency. Therefore, gold is only worth what someone will pay for it.
According to some, the value of gold should be related to the cost of a men’s suit, belt and shoes. Some think this originated from Roman times when a Roman toga, belt and sandals costed an ounce of gold. This is somewhat insane to me.
End of the World
If you are an end-of-the-world survivalist, how much will gold really be worth if the U.S. became under siege? I mean think about it, who wants to trade food for gold? Wouldn’t society barter useful goods such as water for food or other necessities?
Let’s say that you do buy gold bullion. Do you really want to hold that much gold at home? This is no different than stuffing cash under your mattress. I know some people feel uncomfortable personally holding that much gold and in turn will store it at the bank or other secure locations. This now means that you are now paying someone to hold your asset.
Another argument that I usually hear is that gold is good against inflation. I wish that were the case, but there isn’t a direct correlation between the two. Sure, it’s good, but no better than treasury inflation-protected securities (TIPS) without the wild swings up and down in the market. Here is a chart of gold over the years. As you can see, gold has returned the same amount as the TIPS over the long term, without the volatility of the market. Most prefer that the market have a consistent arc that increases over time. The peaks and valleys of the gold market are not for the faint of heart.
Starting in January of 1928, it took 0.85 ounces of gold to buy a share in the S&P 500. Today it now takes 1.66 ounces of gold to buy a share in the S&P 500. This means that gold has lost value relative to the price of the S&P 500. Therefore, why wouldn’t you invest in the S&P 500 since it has held up over time through numerous wars, recessions and presidents.
Hopefully I have you convinced that gold is not a good investment, but a hedge from crisis. While I don’t personally feel comfortable holding gold, I know some are convinced that it is a critical component of their portfolio. Until I see data otherwise, I will continue investing in assets like the S&P 500.
Do you have the gold bug? What are your reasons for holding gold? Share your thoughts below.