Is Gold A Good Investment?

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. 

 

investing in goldBesides 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.

 

Crisis Hedge


investing in goldSo, 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.

 

Gold Valuation

investing in goldThere 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?

 

Storing Gold

investing in goldLet’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.

 

Inflation

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.

investing in gold

Gold Price History in 1960–2014

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.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.

31 Comments

  1. I’m with you as well, never saw the value in investing in gold. Plus the cheesy and pushy commercials are annoying, it makes it feel like you are buying from a used car dealership.

    I used to see gold as basically a hedge against inflation, but completely see your point on the better inflation hedge of TIPS with less volatility. And as you mentioned, can’t forget about storage and security!

    Not an ideal investment in the least bit…Thanks for the post!
    The Green Swan recently posted…The Green Swan: Six Months in FlightMy Profile

    • Yes!!! The cheesy commercials are the worst. They definitely feel like used car salesman or even a late night infomercial. I hate to know how many people have been duped over the years by this “investment”

  2. The points in the early 80s even point to gold as a poor inflation hedge. 1980 is the highest point on your chart but obviously we’ve seen inflation since then. The simple reality is if you really want to hedge via a commodity pick one with usage value. I wouldn’t suggest that approach either given the sales of the underlieing commodity might decline, but at least there is something underlieing the value proposition of the commodity. Tips are not so hot either given they only adjust every 6 months. As such during shocks they are not the best either. Stock are probably your best inflation hedge in the long run.
    Full Time Finance recently posted…What should you do for Asset Allocation?My Profile

  3. No gold for us.

    I get wanting to own something real, rather than just stocks and bonds. But gold bullion is heavy. Gold jewelry and gems are portable, so maybe if you were in a highly unstable environment (like 1930s Europe or today’s Middle East) it might be a decent hedge, but generally in a refugee crisis it loses a lot of value. Like a diamond for a loaf of bread sort of thing. Those images of refugees though might be where some of the “gold is safety” philosophy comes from.
    Emily Jividen recently posted…State of the Blog: September 2016My Profile

    • A couple of years ago there were families in my neighborhood that were robbed because in certain cultures they keep gold in their homes. At first they thought the robberies were random until they started to see a pattern with the ethnicity of the families. They finally caught the people stealing but it made me think…why would you store so much gold at your house?

  4. I’m with you. What’s interesting, though is that there are a few reputable-sounding (emphasis on sounding) people who praise gold – Peter Schiff for one. He’s a good economist but has a biased interest in gold. I’m glad you mentioned TIPS. Even though Mr G likes the 2-fund approach for retirement, holding a small amount in TIPS would be a smart move.
    Mrs Groovy recently posted…I Hope Pfau, Kitces, and Collins Know What the Hell They’re Talking AboutMy Profile

  5. Great analysis!

    The real annual return on gold over the last 30 years barely registers positive. And as you point out, the volatility is downright scary. Plus, gold and other commodities don’t pay dividends. Not much of a case for gold, I’d say. (I once said gold’s a good investment only for rappers and/or other people with terrible teeth, and that still seems about right.)

    You’re smart to prefer equities. Better long-run growth, dividends, and no need to secretively bury your stock certificates in the back yard in the middle of the night!

    Great read – thank you!
    FinanciaLibre recently posted…3 Lessons In Life and Economics: When Things CrackMy Profile

    • Hahaha…I love the line “I once said gold’s a good investment only for rappers and/or other people with terrible teeth, and that still seems about right.”

      I didn’t know that gold grills were still a thing until I say Jada Pickett Smith rocking one.

  6. Gold offers at some points in time great opportunities. Early this year was one like that… I did not quite buy at the bottom or I will not exactly sell the top. And yet, the results are more than satisfying. To me, it is a cyclical product (like everything). It has now a place in my play portfolio.

  7. “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.” I don’t really agree with this. If you have the same economic views as Peter Schiff and others in that camp, the recession we saw around 2008 was very predictable. It’s not like economics are a complete mystery. If you hold interest rates artificially low for too long you will of course see a bubble. I think people learned last time around and it’s pretty obvious we have a bubble on our hands now. Thankfully less economists live in delusion these days and more and more people realize the huge impact the Fed has on the economy.

    With that being said, it would be pretty shocking for gold to not go up over the next five to ten years. The bubble has to pop eventually.
    DC @ Young Adult Money recently posted…5 Specific Situations Where Planning Ahead Saves You MoneyMy Profile

    • Hi DC – I really appreciate your comments. I always enjoy hearing differing view points.

      I can’t speak for others but I’ve always thought the Fed has more power than the President when it comes to the economy.

      I think in terms of economists the competing views of Keynes vs. Hayek leads to many disagreements.

      Often times the difference between economic policies between the Republicans and Democrats boil down to whose camp you are in Keynes who is in vogue or Hayek whose policies led to Margaret Thatcher’s conservative party.

      All that to say, the great thing about personal finance is it’s personal. Differing points of view can still profit off different theories.

      Once again I really appreciate your view point it really got me thinking.

  8. The fed does have more power than the president in that way.
    I stack gold and silver. Don’t have a lot of gold but if I want to sell something like let’s say you need money for something. You decide to sell stocks. You sell 10,000 dollars in stocks. IRS takes their share at the end of year.
    Now you take 7 ounces of gold to your local about to close coin shop. He gives you cash, it is not reported to the IRS on your end.
    Don’t buy off TV don’t store at some mythical place that reports it to the IRS when they mail it to you. Stack it in a gun safe.
    If I do have to sell I would much rather sell coins than stocks but my goal is along with everything else pass them on to my heirs
    Doug recently posted…NRZ BuyMy Profile

  9. Awesome post! I feel the same way about gold. Even in the event of an apocalyptic crisis, commodities such as rice, beans, and toilet paper would be more useful investments. You can’t eat gold, or wipe your but with it – at least not very well.
    Mr Crazy Kicks recently posted…Take a Picture, It’ll Last LongerMy Profile

  10. I feel much safer having my 3 month supply of toilet paper at home than I would gold. If anarchy happens, I have something of value to trade if necessary. And the happiest butt in the crisis. Gold has no value to add.

    • Totally agree with you. In Venezuela people are lined up for bread, meat and toilet paper. I’m not sure gold will do any good for those that NEED these items.

  11. This is what Dave Ramsey says about gold as well. I’m not sure if I would ever invest in gold. I haven’t so far but I’m not completely ruling it out. I think if I ever invest in gold, it would be like a “fun investment.”
    Lila recently posted…Blogging DirectionMy Profile

    • I had a friend that invested in platinum because it was the first time that platinum was worth less than gold. He too a chance and decided to buy some platinum thinking it would quickly swing back. It did and he made his profit and jumped out. Whatever works as an investor for you is probably the right decision.

  12. South Asian culture holds gold as hedge,due to no access to traditional investment options.I come from that so we cant really say no to holding physical gold.

  13. I definitely wouldn’t consider myself a gold bug but that being said I do own some physical gold and silver that I keep. It’s a nice out of sight out of mind type of value store the way I see it. I’m not a trader or speculator in the metals but can appreciate their beauty and collectability too. I’m much more for buying assets that provide me an income like dividend stocks but I do have some room for holding precious metals on the side too.
    DivHut recently posted…Dividend Income Update September 2016My Profile

  14. The mainstream media has done a great job of demonizing gold via their almost daily anti-gold propaganda articles. They do this for many reasons. Sadly, “the herd” follows their advice … and their paper currencies buy less and less each year. The “you can’t eat gold” mantra is just about the dumbest thing I have ever heard, to be blunt. You can’t eat stocks or bonds or real estate, or annuities, either.

    • Thanks for sharing your perspective.

      I’ve heard from a couple of people that disagree with me and can definitely appreciate the counterpoints.

      While I don’t think gold will have a place in my portfolio I can definitely respect those that do.

      Thanks again for stopping by!!!

  15. For me I do see a place for gold in my future investment portfolio, whether it be the physical or trading it.. For me it’s really got to depend on the individual and while it is unlikely to ever form a large part of my portfolio for reasons you’ve mentioned above, I see opportunities where it might be good to hold

    Cheers for writing this MSM, love your work! 🙂

    • Thanks Jef for commenting. I always like to hear differing points of view. While it may not make financial sense for me, thanks for sharing your point of view 🙂

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge