Is Gold A Good Investment Now?

2011 February 1
by Kyle Bumpus
from → Investing And Investments

With gold trading near an all-time high and fears of global economic instability running rampant, gold has been getting a lot of attention. It should come as no surprise that gold’s popularity should peak along with its price, but that doesn’t necessarily mean that a.) gold is in a bubble and b.) gold prices can’t march higher still. Indeed, in a hyperinflationary world (or one in which the dollar depreciates rapidly) gold is likely to be a good investment at any price. Or at least that’s the theory. But is it true?

Is Gold A Good Investment Now?

Look, anybody who claims to know what the price of gold (or any other investment, for that matter) will do in the future is either delusional or selling something, and possibly both. I don’t know what the price of gold will be in 6 months, 12 months, or 17 years from now. That said, I’m pretty confident when I say that gold is not a good long-term investment now, or ever. This is not to say a small amount of gold in the context of a larger portfolio can’t be beneficial, but I’m convinced that exposure should come along as a small part of a broader exposure to commodities in general. Let me count the reasons why gold shouldn’t form a large portion of your portfolio on its own. And yes, I say this knowing the long-term performance record of the Permanent Portfolio.

Gold Doesn’t Appreciate In Value

Gold bugs are fond of saying that gold doesn’t appreciate, the dollar just depreciates. Ignoring for a second the obvious flaws of that argument, why would you want to invest in something that doesn’t appreciate over time? It’s true that most gold bugs see gold not as an investment but as a store of value, but there are better ways to store value, and some of them, such as real estate, actually throw off income. Gold doesn’t. Gold sits there, collecting dust.

Storage Costs Are High

Gold doesn’t do, well, much of anything. It sits there. And sits. And sits. Now, there’s nothing inherently bad about that — after all, a house generally sits in one place too. But you can rent a house to generate enough income to pay for itself (and hopefully put some extra cash in your pocket every month). But you can’t rent gold. In fact, you have to pay somebody to take care of it. At the very least you’ll need a nice big vault and maybe a few armed guards to keep the bad guys away. So even if the price of gold does track inflation, your investment won’t, since the price of gold doesn’t take storage costs into account. Buying a gold ETF helps alleviate this problem somewhat since the storage costs are spread over so many investors, but there are still storage costs.

Gold Doesn’t Pay Dividends

It bears repeating.

Gold Doesn’t Pay Dividends

Just one more time…

Gold Doesn’t Pay Dividends

Alright, enough of that.

There Is Nothing Special About Gold

Gold bugs like to argue that gold has special properties that makes it an ideal store of value. It has universally been used as money all over the world for thousands of years, they (erroneously) say! Nevermind that the ancient Egyptians paid the engineers who built the pyramids in beer, not gold. Or that many pacific island civilizations had never heard of the stuff. No, there’s something special about gold! It has intrinsic value!

No it doesn’t, at least not enough to justify modern prices. Sure, gold has some important industrial purposes, but would you really pay $1,300 per ounce to run gold electrical wires in your house? Of course not. Gold’s industrial uses are worth only a very tiny fraction of the current price of gold.

But the most obvious reason why gold isn’t likely to be a good investment is that there’s now a website devoted solely to tracking the price of gold: goldprice.org. I mean come on, how much larger a contrarian signal do you need? Bahh, I’m just glad I didn’t snatch up RealEstatePrice.org a few years ago. Although according to WhoIs.net, somebody did. And look at that, there’s no longer a site at that address. I wonder why…

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5 Responses
  1. 2011 February 13

    Interesting perspective, with so much “pro-gold” info out there this is definitely a different angle. Thanks so much!

  2. 2011 March 28
    Rich permalink

    Gold doesn’t pay dividends, but it is finite, unlike money. It is also rare – hence the value. That it was easily workable into coins was practical. To say that gold does not appreciate does not make sense… appreciate vs what? You have to mean money.

    It certainly does appreciate vs currency- as today’s fiat money is a bogus ponzi pyramid scheme. If you measure house prices in gold – you will see a bubble that peaked around 2005 and is now back to historical norms. These values are intrinsic and comparable. However, houses may generate rental income, but they also need new roofs and central heating systems, and ground rate taxes paying amounting to thousands each year.

    If you had £100,000 in gold in yr 2000 it would now be worth £600,000. How is that not appreciating?

    Right now the fed is bust and will need bailing out with more bonds and more printing bogus dollars… people know that the fiat money system is out of control and want something tangible – gold. It may not have “real worth” in the sense of industrial use, but then neither does fine art, diamonds, or beautiful women… their worth is intrinsic, and when the fiat money system implodes what else will we measure value in? Turnips?

  3. 2011 August 13
    Steve permalink

    Rich is so right Kyle should look up the word appreciate in the Dictionary Gold is Not a Commodity it is a Currency. Has been for over 4,000 Years.

  4. 2011 August 14

    By definition, gold is a commodity. I’m not sure how you could even argue that it’s not. And I’m well aware of the definition of the word “appreciate.” And Rich no, I don’t mean versus money. I mean versus purchasing power.

    And Steve, gold has been used as money in SOME places for over 4,000 years. But MOST ancient societies did NOT use gold as money. Gold as money was mostly a Eurasian thing. And just because it’s been used as money in the past doesn’t mean it will continue to be used that way in the future. What if people decide to use some other shiny metal instead of gold? It’s happened over and over again throughout history, contrary to what the “gold is money” advocates would have you believe.

  5. 2011 September 29

    Rich speaks the truth I’m afraid Kyle. Sure, there are arguments against gold (perhaps chief at the moment being that a debt deflation would hammer the price of gold) but historical precedent suggests it would only be a matter of time before it flies to the moon again. If we experience hyperinflation, or anything of a similar nature, then you will see the price of gold go through the roof.

    However, I should add an important personal caveat here- I see gold more as a means of protecting my savings, rather than some flashy investment vehicle that is going to make me a wealthy man. I’ve heard a few stories of people mortgaging their homes, selling up their possessions etc to buy gold or silver, now that is some truly INSANE behaviour.

    As with most investments it pays to have a bob each way. I am pro gold as a currency and store of wealth, but I also understand (and think everyone needs to realize) there is major downside risk associated with such an investment.

    Perhaps the biggest problem with true gold bugs is that they tend to get overly emotional about the yellow metal. Look objectively instead, and reach your own conclusion.

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