Why You Should Not Invest in Gold
Gold has long been used as a store of value, helping investors protect their wealth. Due to its low correlation with stocks and bonds, investors often include it in their portfolio for diversification purposes.
New investors often forget that gold does not generate income like dividend-paying stocks or reliable bond yields, and should therefore only form part of your portfolio in small proportions.
1. It is an unproductive asset
Although some investors invest in gold with the hope that it can serve as a hedge against financial crises and inflation, the reality has proven otherwise. When considered over long-term time periods, gold returns tend to be significantly lower than those seen through other markets.
Warren Buffett emphasizes this point in this lesson, by noting “gold is neither money-earning nor wealth-generating; real long-term investors should put their investments to work by choosing productive assets that create wealth.”
Physical gold ownership entails storage costs, insurance premiums, commissions and commissions that may erode any gains over the long-term. A well-diversified portfolio can include gold in a low risk and cost efficient manner by investing in ETFs, mutual funds or stocks of companies mining or refining precious metals. Such investments have the potential to produce positive returns without correlating with other asset classes and can help diversify portfolios without jeopardizing long-term performance appreciation potential.
2. It is a store of value
Gold has long been seen as an attractive form of savings during periods of political and economic unease, thanks to its ability to resist inflation. While gold may offer protection against this risk, other investments exist such as Treasury Inflation-Protected Securities that provide even better solutions against it.
Investors can invest in physical gold or trade its derivatives such as futures and exchange-traded funds (ETFs), however both options come with storage costs and capital gains taxes that must be paid upon sales of investments. Furthermore, gold prices can be highly unpredictable, possibly not providing returns that match expectations.
Many investors use gold as an insurance against loss and to improve their portfolio’s performance. Although diversifying can help achieve financial goals, adding gold should not be done impulsively in response to an event or out of fear for the future.
3. It is a commodity
Gold lacks productive value, so investing in it does not contribute to economic development. Instead, this precious metal serves as a safe haven during times of economic uncertainty if you have sufficient time to wait out price drops. Furthermore, buying bullion directly can be costly due to storage and insurance fees, dealer markups and investment fees.
Gold may be worth investing in for some investors, depending on their goals and risk tolerance. Gold can act as an effective diversifier, since its prices do not tend to track those of stocks or bonds; its prices also tend to rise during market declines; but as it doesn’t generate income itself, this asset should make up no more than 5-10% of one’s portfolio – leaving room for income-generating assets like stocks and bonds.
4. It is a speculative asset
Gold investing can provide a means of diversification in any portfolio. Due to its historically low or negative correlation with many asset classes, investing in gold may serve as an effective hedge against inflationary tendencies and economic downturns.
Gold bulls may point out brief moments where Gold outpaced inflation; however, in most long-term periods standardized periods Gold has lagged inflation by an impressive margin. Stocks, however, have consistently outshone it by far.
Physical gold investing comes with storage costs, capital gains taxes and commissions that erode its profit potential, so we do not advise it as an investment strategy unless your time horizon allows you to hold onto it for an extended period. Otherwise, stocks and bonds offer higher returns with lower volatility over the long-term. *This article has been prepared without taking into account your individual goals, financial situation or needs – please consult a qualified advisor for advice before making decisions based solely on this article.
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