Is Gold a Terrible Investment?
Gold has long been seen as an investment to protect against inflation and market instability, though some even consume it directly as food. Although that may seem appealing, experts advise against doing this themselves.
But what has gold done as an investment? According to data analysis, gold has underperformed stocks over nearly every timeframe imaginable – here’s why.
1. It’s Not a Currency
Gold has long held humans enthrall. It’s one of the rarest, most eye-catching elements on the planet; non-reactive so as not to tarnish or corrode; durable; with just enough scarcity that it makes it desirable.
Gold is also fungible, which means no matter who mines it or from where, the quality remains constant – which made it ideal for supporting currencies during simpler times.
Today, many investors still invest in gold with the hope that it will regain its place as a currency standard. Unfortunately, its price varies like any commodity, being negatively related to interest rates and the U.S. dollar; production costs also limit supply – making it unlikely that gold ever serve as an actual mainstream currency again.
2. It’s Not a Safe Haven
Gold can serve as an economic safety net during times of uncertainty; the price tends to increase when stocks decline and inflation becomes an issue.
But is gold truly a safe haven? The truth may surprise you.
Gold does not provide dividends or interest payments and is costly to store safely if you own multiple pieces. Therefore, when considering gold investing, be mindful of your time horizon as prices could take years to recover from their lows. Also keep in mind that investing in companies mining gold could increase equity risk significantly and yield lower returns than investing directly in physical commodities like stocks or bonds.
3. It’s Not a Diversifier
Gold is an unproductive asset that does not contribute to economic development, being worth only what someone will pay for it on any given day. There is no earning potential and storage fees, insurance coverage costs must also be factored in when considering whether to own gold.
Gold has had periods throughout history where it served as an inflation hedge or safe haven during bear markets, but these successes were short-lived. Over the longer run, however, gold underperformed stocks and bonds, making for a poor investment portfolio setup. Furthermore, its prices often fluctuate independently of other assets – thus many investors choose to add it into their portfolios in order to reduce risk during any particular market event.
4. It’s Not a Growth Asset
Gold does not produce dividends or produce profits like stocks do; rather, its value fluctuates depending on supply and demand. Furthermore, as a physical asset it comes with storage and security costs as thieves may attempt to take your shiny metal away.
Some investors purchase gold as a hedge against inflation. Rising prices make it harder to afford necessities; your dollars have only so much purchasing power if inflation continues unchecked.
History suggests that gold may not provide the desired level of inflation protection and often has negative correlations with stocks and bonds, reducing overall risk as expected. Discover more by requesting your free investor kit online now!
5. It’s Not a Tax-Free Investment
The Internal Revenue Service imposes taxes on investment income, such as profits from selling an asset such as gold. They also tax capital gains – value increases due to changes in the market without your intervention – but in both instances capital gains taxation applies as well.
Physical gold purchases come with additional storage and insurance costs that could add significantly to its costs of ownership, but investors can avoid these expenses by opting for an ETF which offers greater liquidity and has lower bid/ask spreads compared to individual physical metals.
Though precious metals do have their benefits, most investors find a more balanced portfolio to provide diversification, inflation protection and long-term returns more suitable. Invest in something with greater protection from market fluctuations while still producing long-term returns is wiser.
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