Why Gold Is a Terrible Investment

Why Gold Is a Terrible Investment

I recently received a private message from someone who had read my blog, messaged me, and tried to convince me to invest in gold. I never did respond to the message, but it did get me thinking about alternative investments to the stock market. Why didn’t I invest in gold or other commodities? What was so bad about that kind of investment? Well, I can think of several reasons not to invest in gold.

The Rate of Return Is Abysmal

Simply put, the rate of return on gold is absolutely horrible. In 1980, gold was trading at about $800 an ounce. During the financial crisis of the past few years it got up to about $1950. When you adjust for inflation that $1950 figure was less than the price was in 1980. Since then gold has dropped almost 45%. That means since 1980 gold has risen only 50% in just over 30 years (the price currently sits at just under $1200). And that isn’t adjusting for inflation. In other words, if you had held gold for the past 30 years you would actually be losing money.

Counter that fact with the idea that the stock market has gone from the Dow being about 800 in 1980 to now being almost 18,000. I will take stock market investments any day of the week.

Having Gold Doesn’t Protect You From Economic Downturns

One of the biggest concerns with many people today is the amount of debt the United States holds. Currently, the U.S. has over 18 trillion dollars in debt, which is about the current GDP of the U.S. Certainly, that debt load is too high for the U.S. and should be brought down. Those who see this high debt figure believe we are headed to a German style hyperinflation or Zimbabwe. The paper that we use to buy things won’t we worth toilet paper.  Gold is the only thing that will hold value.

I have two thoughts on this subject. FIrst, the only reason gold has any value is because human beings have said it has value. Like any commodity or medium of exchange it is socially constructed. Tomorrow, we could wake-up and say that coconuts have as much value as gold as long as everybody agrees to it. Gold is a precious commodity and is used in a whole host of products in the United States, but it like the greenbacks we use to buy goods and services only has value because we (i.e. people says it does).

Second, if we do go into a hyperinflation situation do people really think that gold will be the primary means of exchange for goods and services. What is someone going to do break off a hunk of gold with their teeth to buy a loaf of bread? I mean the thought is illogical. In that scenario people will most likely barter their services. Gold will have little to no value as a medium of exchange for basic things in life. It will essentially be useless.

The Fees To Buy Gold Are Too High

For shits and giggles I inquired a while back how to buy actual physical gold. It isn’t that hard to do. You can find a variety of gold brokers in the mall. All you need to do is exchange your old or broken jewelry and they will give you CASH!

Actually, I am talking about purchasing gold coins. There are a variety of gold coins from the South African Krugerrand, Canadian Double Eagles, American Gold Coins, etc, etc. However, in order to buy these coins you don’t only pay the face value of what gold is worth that particular day. You have to also pay a fee above what an ounce costs, which can be upwards of 4 to 5% of the actual price of gold. So I have to pay an extra $50 to buy a gold coin. No thank you.

I can spend that same money and buy shares of a company if I want and it is more likely to go up in value.

There Are Simply Better Investments

If you don’t trust the stock market that is fine. There are plenty of other investments out there that can actually lead to financial independence and wealth. For example, real estate is one area. I am certainly no expert and I don’t plan on becoming a landlord or buying property where I would rent it out anytime soon (although the thought has occurred to me).

Yes, I know housing went down in 2008. Yes, I know a lot of people lost their homes. Yes, I know that a lot of people are still under water. However, real estate can be a good investment because unlike gold you can actually live in your condo, townhouse, or home. You can add onto your property and make improvements that will increase its value. You can’t do that with gold.

There is no guarantee that real estate will go up. But it certainly has a better track record than gold and if nothing else you can live in the item that you paid for. You can’t really do anything with gold except to look at it. I mean you can’t take a gold coin to the grocery store and buy food.

The Bottom Line

Frankly, I think anyone who buys gold is being sucked in by doomsday preppers or they are watching too many apocalyptic movies. Gold, or silver for that matter, is just not a good overall investment. I guess it is better than putting your money under the mattress. But in general the best way to build wealth through investments is still investing in the stock market.

It doesn’t take much to learn how to do it. And for most people they should just stick their money into a good index fund, keep adding to it, and let compound interest do its magic.

2 thoughts on “Why Gold Is a Terrible Investment

  1. The problem with gold is that it’s not really liquid, no pun intended. If you need to buy a good or service in a cashless economy, are you going to saw off a piece of a bar?

    Not to mention that it’s always a terrible idea to buy at a time that everyone else is jumping on the bandwagon.

    Also, I’m incredibly depressed at how much inflation has happened in my lifetime. I didn’t realize it was that bad. Ugh.

    1. I totally agree about gold and illiquidity. I don’t know why people get into it so much. I just don’t see the Zimbabwe scenario that some others see, but if that is what they want to do with their money….so be it.

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