Why Gold is a Dumb Investment
Many people mistakenly believe gold to be a safe long-term investment, yet this would be incorrect. According to The Oracle of Omaha – who cares deeply about statistics like book value and cash flow – your hard-earned dollars would fare far better in stocks rather than yellow metals.
Investors concerned about inflation should consider making real estate or top brand blue-chip stock investments their priority, as these types of investments tend to fare well during periods of high inflation.
It’s not a currency
Gold may have once served as currency, but it no longer is considered one. The gold standard – which tied currency directly to its value – was discontinued in 1971 and no longer represents a viable form of payment.
Modern investors use stocks and bonds as investments with high potential returns, diversifying their portfolios with commodities and mutual funds for added protection.
Investors commonly use ratios like price-earnings, price-book value and enterprise value ratios to judge the value of companies. Cash flow statements and dividends also offer some insight into whether stocks are good values. Gold has no earnings or cash flows to consider.
Many investors mistakenly believe that investing in gold is the way to protect themselves against inflation. Unfortunately, this assumption is incorrect as gold’s prices primarily depend on supply and demand factors – making its prices highly unpredictable. A better strategy for protecting yourself against inflation would be buying large-cap blue-chip stocks which have the ability to grow their sales revenue and earnings faster than inflation rates.
It’s not a store of value
Gold may be an attractive investment option, but it shouldn’t be seen as a safe store of value. Making money off gold can be challenging because there are no dividends or tangible output from its use – further complicating matters for investors looking for liquidation options. Investors may want to explore other investments instead.
Even though gold’s return may be low, some consider it an effective hedge against inflation and geopolitical tensions. Central banks have increased their holdings of the precious metal out of concern about hyperinflation and possible currency crises in their nations.
Gold hasn’t had much of a successful track record as an investment and may not even be the safest bet in times of economic instability – this may explain why Warren Buffett shies away from it. By contrast, stocks provide investors with access to long-term cash flows held by companies which they can either distribute as dividends or retain on their balance sheets as capital reserves.
It’s not a hedge against inflation
Gold has an insufficient track record as an asset to protect wealth against inflation; investing in it yields little return after inflation compared to stocks or even Treasury bills, which offer better long-term protection and generate non-negligible interest yields of around one percent annually.
Gold may be popular, but it isn’t an effective defense against inflation. While it once offered a 35% return during an inflationary period in the 1970s, its subsequent performance has been dismal; investors experienced losses of 10% between 1980-1984 and 1988-1991 respectively. As investors gain greater access to financial markets, their savings will likely shift into stocks or investments that offer greater inflation protection; this leads to less demand for gold which leads to its price dropping – hence gold’s negative correlation to inflation over its half-century existence.
It’s not a long-term investment
Gold is not recommended as an investment option over time; it does not pay dividends and lacks industrial uses, is costly to mine and store, and can easily be stolen by malicious parties. Furthermore, its track record is less than stellar – its price may have seen an unprecedented surge recently, yet this rise could simply be recency bias at work.
Gold may attract investors looking for diversification strategies, but it may not provide long-term wealth protection. Paper currencies tend to lose value over time while gold only offers limited protection from this loss of value. Instead, invest in companies that generate dividends and increase profits instead. When investors assess a company’s prospects they evaluate its assets, debt levels, cash-on-hand balances and potential return. A diversified portfolio of stocks typically provides superior returns than investing solely in gold.
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