Gold is tangible and has a long track record. For thousands of years, cultures have embraced the shiny metal… but in the modern world, gold is a bad investment.
History books show that precious metals improved trading. Some of the oldest coins date back to 500 BCE… but they’re relics and even modern coins are going the way of the dodo.
With my research below, I’ll show you exactly why smart investors avoid buying gold. On top of that, you’ll see why I no longer buy stock in gold mining companies.
Hint: There are better places to store your money.
Why is Gold a Bad Investment?
Businesses pay a lot of money to dig gold ore out of the ground. They pay to refine it. Then they pay to keep it safe… all the while, it produces nothing.
This is one of the top reasons I avoid buying gold. Here’s a more thorough list…
- Gold Doesn’t Produce Income
- Dealers Charge Fees Above Spot Prices
- Storage and Insurance Costs Eat Away at Returns
- Gold Lost its Currency Status and has Little Utility
- It’s a Bad Short-Term Inflation Hedge
- Gold Won’t Save You During an Apocalypse
Gold is worse than a no-value added asset. It sucks away value over time. There are a few caveats for short-term gold investing… but timing the market is a fool’s game. Many people buy it in hopes that another fool will buy it for more down the road. Aka Fools Theory
A Brief History of Gold
King Henry VII ruled during the creation of the first Sovereign gold in 1489. Then a few centuries later, the UK linked its currency to a fixed amount of gold. And by 1900, most of the world had followed suit by adopting a gold standard.
During the First World War, countries abandoned the gold standard and moved to a fractional system. This allowed the countries to inflate their currencies and pay off debts from the war. But that currency manipulation wasn’t sustainable.
After the Second World War in 1944, a new gold standard took root with the Bretton Woods Agreement. The agreement pegged other nations’ currencies to the U.S. dollar. Anyone could then exchange $35 for an ounce of gold.
But alas, that system didn’t survive either. In 1971, President Richard Nixon suspended the dollar’s convertibility into gold due to inadequate U.S. gold supply. By 1973, Bretton Woods collapsed and countries entered the modern fiat money age.
Governments now command the value of their currencies. A dollar has no intrinsic value and the system survives on trust. The word “trust” shows up on your dollars…
Buying gold is a way to limit government control. This is a major selling point for gold investors. That’s one reason I bought gold back in the day… but the cons outweigh the pros. Continue reading to learn why gold is a bad investment…
Does Gold Hedge Against Inflation?
Gold coins increased in value by 704% from 1950 to 2000. And in 1950, $1 had the same buying power as $7.18 in 2000. That’s a 618% increase… so yes, gold is an inflation hedge in the long-term.
Gold hedges against inflation over many decades. But in the short-term, it’s too volatile. Instead, you can use treasury inflation protected securities (TIPS) to maintain purchasing power with lower risk. And a far better option is to invest in the stock market.
The S&P 500 returned 8,345% from 1950 to 2000. With dividends reinvested, the return skyrocketed to 54,205%… I’d take that return any day over gold’s measly 704%.
Some gold bugs still might be sticking to their precious metal at this point. They might argue that gold will help them survive a doomsday scenario. But will it really? Let’s break down that logic…
Investing as a Crisis Hedge
The probability of seeing a doomsday collapse in your lifetime – and gold turning into a top means of trade – is close to zero. But let’s entertain the idea…
All hell breaks loose. A catastrophe destroys the money system. Good thing you’ve got that vault filled with gold.
Or wait, no one wants your gold…
Food, ammunition and medicine are the real currency. Instead of stashing $100,000 worth of gold coins, you could have built a fully stocked safe house – and rented it out on Airbnb to make some extra cash.
Then during a complete collapse, you can trade a few of your extra MREs for more gold coins than you could have started with.
Gold Mining Companies
Alright, you’ve made it this far. The evidence is in, and gold is a terrible investment. But how about investing in gold mining companies?
I think a quote attributed to Mark Twain sums it up…
A gold mine is a hole in the ground with a liar on top.
That might be why penny mining stocks used to be a favorite for pump and dump schemes. Nonetheless, let’s look at some more reputable gold mining stocks.
One of the oldest gold mining funds I can find is VanEck Vectors Gold Miners ETF (NYSE: GDX). It’s a global market-cap-weighted index that started in 2006. And since then, its shares have dropped 42%… but over the same timeframe, gold is up more than 90%.
This result rhymes with other gold funds. So I’m staying away from the gold mining industry. That’s unless it’s through direct employment. I hear gold mining operators can make a pretty penny.
Conclusion
I invested in silver and gold coins in my early days… but for the reasons above, I’ve avoided doubling down. Gold is a terrible investment when compared to income producing assets. I’ll stick to dividend stocks – like my recent purchase of AT&T shares. I bought when the dividend yield topped 7%.
Have any unique gold research or comments to share? Please reach out in the comments below.
Invest mindfully,
Brian Kehm