Why is Gold a Dumb Investment?
Gold may seem like an appealing investment option if you’re looking to diversify your portfolio; after all, its price often increases as other assets decline.
But you would do better to put your money in stocks that create tangible wealth rather than speculate on gold’s price in the future. Here is why.
It’s irrational
Gold remains one of the world’s most precious assets despite critics, acting as a safe haven in times of economic instability and seen as an effective hedge against inflation. Yet there may be several reasons to avoid physical gold as an investment vehicle.
First and foremost, physical gold does not generate a steady source of income. Furthermore, storage and selling costs money too – you might pay commissions when selling it on. Plus its return rate often falls in comparison with stocks.
Shayne McGuire, manager of Gold investments for Texas Teacher Retirement Fund, emphasizes that even an abrupt switch from bonds to gold won’t cause economic calamity. According to him, only about 0.5 percent of global assets are currently committed to gold – less than most pension and sovereign wealth funds have in gold investments – which leaves plenty of cash sitting idle on the sidelines.
It’s not a hedge against inflation
People investing in gold often view it as an inflation hedge – and that belief is widespread. Unfortunately, however, this notion is actually founded on myth.
Gold has not proven itself an effective hedge against inflation; indeed, over three-decade periods it has performed worse than other assets.
Though this could be due to many causes, one plausible hypothesis suggests that gold has fallen behind as an inflation hedge due to unusual events like global financial crises and geopolitical unease.
Gold has also seen price gains due to central banks’ accommodative monetary policies, though this should only serve to artificially boost prices rather than serve as an inflation hedge for future inflation. Finally, as gold is non-productive asset and does not generate dividends or interest payments it makes it an unsuitable choice for investors looking for reliable income generation.
It’s not a store of value
Gold has long been used as currency, store of value and symbol of wealth for millennia. Due to its durability and rarity, it makes a good investment choice; however, gold’s poor track record as an inflation hedge makes it unsuitable; returns have lagged stocks by more than three decades and has proven completely ineffective since inflation reached four-decade levels in recent years.
Physical bullion requires a significant initial investment and should be stored safely – whether at home or in a bank safe deposit box – which can be expensive and reduce overall returns. Furthermore, gold does not produce income in the form of dividends or interest, which can frustrate investors seeking regular cash flows. Many opt out because they believe gold doesn’t make for good store of value investments; these individuals could be missing out on opportunities with other investments instead.
It’s not a good investment
Gold has historically been tied to currency values by means of what’s known as the “gold standard.” This practice continued until President Richard Nixon abolished it in 1971. Although gold can be an attractive investment option, its future returns can vary widely depending on many factors.
Gold investment can be risky and result in poor returns, making it unsuitable for those seeking liquidity or dividends or interest payments. Gold doesn’t pay dividends or interest payments either – instead it just sits there fluctuating in value over time.
Gold is not an effective hedge against inflation due to its poor track record in protecting against rising prices. Instead, stocks offer more secure returns that are tied to corporate profits; additionally, stocks pay dividends or interest unlike physical gold, making stocks an appealing investment choice for investors looking for steady returns.
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