Why Investing in Gold is a Bad Idea

Is investing in gold a bad idea? Even though gold no longer backs the U.S. dollar or other worldwide currencies, it still carries importance in today's society. It is still important to the global economy. 

Several central banks have added to their present gold reserves, reflecting concerns about the long-term global economy. Investors can invest in gold through exchange-traded funds (ETFs), buying stock in gold miners and associated companies, and buying a physical product. 

Some might argue that gold is a barbaric relic that no longer holds the monetary qualities of the past. In a modern economic environment, paper currency is the money of choice. On the other end of the spectrum are those that assert gold is an asset with various intrinsic qualities that make it unique and necessary for investors to hold in their portfolios.

There are two sides to every gold coin: investing in gold is a lucrative idea, and investing in gold is a losing idea and then there’s the truth. The truth always sits somewhere in the middle and, in this case, the truth is rooted in a multitude of factors spanning your investment goals, time horizon and, ultimately, your investment strategy.

Gold has already been a valuable commodity for investors for centuries, used as both a currency and a symbol of wealth in various ways throughout time. Sure, physical gold can be risky and comes with some cons, as is the case with all investments. 

For example, returns on physical gold tend to be poor. If you purchase gold jewelry, you may not earn as much when you sell it as you paid when you bought it. Safely storing physical gold can be difficult, as it’s vulnerable to theft.

Physical gold will never be a passive, steady source of income. You purchase it and sell it, but it does not earn compounded interest like a stock could over time. But where there are risks, there are also rewards, which, for some, mean reasons.

Is it a bad time to invest in gold?

Gold is not always a good investment. The best time to invest in almost any asset is when there is negative sentiment and the asset is inexpensive, providing substantial upside potential when it returns to favor.

There are both advantages and disadvantages to every investment. If you are opposed to holding physical gold, buying shares in a gold mining company may be a safer alternative. If you believe gold could be a safe bet against inflation, investing in coins, bullion, or jewelry are paths that you can take to gold-based prosperity. 

If your primary interest is in using leverage to profit from rising gold prices, the futures market might be your answer, but note that there is a fair amount of risk associated with any leverage-based holdings.

1kg gold bars

Gold as a safe haven

Investors typically look at gold as a safe haven during times of political and economic uncertainty. History is full of collapsing empires, political coups, and the collapse of currencies. 

During such hard times, investors who held gold were able to successfully protect their wealth and, in some cases, even use the commodity to escape from the turmoil. Whenever there is some type of global economic uncertainty, investors will often buy gold as a safe haven.

Gold as a dividend-paying asset

Gold stocks are usually more appealing to growth investors than to income investors. Gold stocks often rise and fall with the price of gold, but there are well-managed mining companies that are profitable even when the price of gold is down. 

A relatively small increase in the price of gold can lead to significant gains in the best gold stocks and owners of gold stocks usually get a higher return on investment (ROI) than owners of physical gold.

Even those investors focused primarily on growth rather than steady income can benefit from choosing gold stocks that demonstrate historically strong dividend performance. 

Stocks that pay dividends tend to show higher gains when the sector is rising and fare better on average, than non-dividend-paying stocks when the overall sector is in a downturn.

Gold mining sector

Companies that extract gold can experience high volatility. When evaluating the dividend performance of gold stocks, consider the company's performance over time in regard to dividends. 

A company's ability to sustain healthy dividend payouts is greatly enhanced if it has consistently low debt levels and strong cash flows, and the historical trend of the company's performance shows steadily improving debt and cash flow figures. 

Since a company may go through growth and expansion cycles when it takes on more debt and has a lower cash on hand balance, it's important to analyze its long-term figures rather than a shorter financial picture timeframe.

Benefits of Holding Gold 

Seasoned gold buyers understand the profit potential behind the precious metal. When it comes to safeguarding their hard-earned wealth, their cash may be better off in gold, not paper money, here are several reasons to consider gold as an investment.

Gold is easy to liquidate.

The value of your gold lies in neither its condition nor its rarity but, rather, the gold content. Physical gold is easy to liquidate. There are always buyers ready to buy gold, even if the return rate is not what you hope to earn.

Gold could be far more efficient than cash at storing wealth. Interest rates remain low, meaning that your money in the bank “earns virtually nothing. When you account for inflation, that cash may have actually lost value.

Gold recovers quickly.

Gold tends to recover its value relatively quickly through inevitable market volatility. That’s largely because, often, it fluctuates in opposition to economic swings.

You don’t want uncertain reserve assets.” With a track record of more than 5,000 years, gold could be the opposite of uncertain. Gold is not a fiat currency. Fiat currencies derive their worth from the issuing government. Unlike paper money, gold cannot be expanded to suit the needs of struggling central banks. 

Due to its inherent scarcity, gold will always be supported. This precious metal has maintained its purchasing power over long periods of time, unlike all of the fiat paper currencies that have been introduced over the years.

Gold preserves wealth.

The reasons for gold's importance in the modern economy center on the fact that it has successfully preserved wealth throughout thousands of generations.

The idea that gold preserves wealth is even more important in an economic environment where investors are faced with a declining U.S. dollar and rising inflation.

With rising inflation, gold usually appreciates. When investors realize that their money is losing value, they will start positioning their investments in a hard asset that has traditionally maintained its value. 

The reason gold benefits from a declining U.S. dollar is because gold is priced in U.S. dollars globally. A weakening dollar makes gold cheaper for investors who hold other currencies. This results in greater demand from investors who hold currencies that have appreciated relative to the U.S. dollar.

Gold diversifies your portfolio.

Gold helps to diversify your investment portfolio and, in doing so, provides a strong hedge against inflation. Gold rates tend to remain unaffected by inflation because it retains its value more than your other investments that are backed by dollars.

The commodity has historically served as an investment that can add a diversifying component to your investment portfolio, regardless of whether you are worried about inflation, a declining U.S. dollar, or even protecting your wealth. If your focus is diversification, gold is not correlated to stocks, bonds, and real estate.

How to Invest in Gold 

You have various options for investing in gold. You can invest in physical gold by purchasing gold coins or gold bullion, as well as gold jewelry. You can also get invested in gold-focused stocks and ETFs. 

One of the main differences between investing in gold several hundred years ago and today is that there are many more investment options, such as:

a handful of gold coins
gold bullions

Gold is inefficient.

Gold is simply a physical asset that people have a tendency to hoard, there are storage costs, and often security costs as it is prone to theft. 

The very metal that's supposed to safeguard investors from runaway inflation and paper money is also constantly experiencing an increase in supply. More gold is mined every year, increasing the world's usable gold supply.

And then there's the taxation.

Gold's return is solely based on the price going up. Thus when you sell gold you create a capital gain, that in most cases will be taxed at the more favorable capital gains tax rate.

However, if one invests in gold in a tax-deferred account, the gains one receives will be taxed based on their income tax bracket, which is typically higher than their capital gains rate. So if an investor does want to own gold it should be done using taxable assets.

All in all, gold is a tricky investment. Does it provide diversification? Sure. Can it be thought of as a currency? That fact seems almost undeniable. But does it hedge against inflation and provide a viable long-term investment alternative to the stock market? Not by a long shot. 

Reasons not to invest in Gold 

Is investing in gold smart? Since the days of the ancients, gold has been prized, coveted and viewed throughout the world as an asset with real inherent value. 

It's still highly esteemed today and investing in gold is considered variously a hedge against inflation, a tool for diversification and a currency in its own right. But is gold a good investment?

Gold investors are right to be afraid of paper money. Their basic premise that paper money around the world is going to be worth less and less over time is absolutely correct. They have the correct basic premise. They should run from paper money. But where they run to is the mistake.

Here are five characteristics that show why a gold investment falls short.

How do you value gold?

The value of any asset is the present value of all future cash flows. The value of a company can be estimated based on forecasts of future earnings and the growth of earnings. Gold does not have earnings and, in fact, if you want to hold physical gold there is potentially a cost to hold and insure it. 

Gold is worth what people are willing to pay for it on that day. The value of gold is determined by supply and demand, which is very hard to predict. Demand usually goes up based on fear and not fundamentals. You can't exactly put a dollar figure on a fear index, can you?

Long-term returns are poor.

Investors are familiar with the phrase "past performance is not necessarily indicative of future results. Gold underperforms equities in all interest rate environments, despite its celebrated popular status as a hedge against inflation.

Gold investments don't throw off cash.

One of the best things about stocks is their ability to produce income for the shareholder. A major disadvantage to investing in gold is that there are no periodic cash flows made to the investor. 

Unlike most stocks and bonds, there are no regular cash dividends or coupon payments made to gold investors. Also, cash isn't used exclusively for dividends. It can also be used to buy back stock or reinvest in the business, neither of which apply to a non producing asset like gold.

Gold has little actual utility.

The precious metal does not provide much utility in the way of production value. Gold loses out to other metals like silver in that regard, which is frequently used in products ranging from electronics to medical devices to solar panels. Gold, on the other hand, doesn’t have many industrial end-uses.

Should you invest in precious metals? 

Anytime you’re analyzing an investment (real estate or stock), you should look at its track record of what it’s done in the past over a long period of time. That’ll give you an idea of what it’ll do in the future.

At no time has gold been used as a medium of exchange for a crashed economy since the Roman Empire. Unless you want to get into the jewelry-making game, investing your hard-earned dollars into precious metals like gold, silver and platinum is not the best use of your money. 

These precious metals are just a commodity like a bushel of wheat or a barrel of oi. In times of economic uncertainty, people run to gold out of the false assumption that it’s going to be a safe investment. 

platinum and diamond necklace

But when people make decisions based on fear or greed, they make poor investment decisions.

gold and silver earpieces

Having a good investment professional on your family’s team can help you tell a good investment from a bad one and help you build wealth over time.

Alternatives to investing in precious metals 

When it comes to investing in precious metals, you’ll spend more time agonizing over the rise and fall of their value on any given day instead of building equity on a home or rental property or seeing growth in your 401(k).

Every day you keep an investment, you’re making the decision to keep your money tied up in it regardless of its current market value. That means you need to invest in things that will make you more money over time.

The most important thing is that you don’t invest in anything you don’t understand.