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Why Investing in Gold is a Bad Idea
Gold has long been viewed as a safe haven asset and a store of value for investors who want to "take some risk off the table." However, recent economic developments and the evolution of financial markets have called into question the wisdom of investing in gold. In this blog post, we will discuss some of the reasons why investing in gold may not be the best idea.
1. Gold is not a productive asset
Unlike stocks, bonds, and other financial assets that can generate income through dividends, interest, or rent, gold does not produce any income. It doesn't produce...anything really. While the price of gold may fluctuate based on supply and demand, it does not generate any income or cash flow. As a result, the return on investment from gold is solely based on the appreciation or depreciation of the price, which is based on our medieval notion of "it's sparkly and I want it." It's effectively investing for hummingbirds.
2. Gold has a low yield
Given that gold does not generate any income, its yield is essentially zero. This is in contrast to stocks and bonds, which can provide a stream of income through dividends and interest payments. For example, a well-managed company can return a portion of its profits to shareholders through dividends, while a bond issuer can pay interest to bondholders. In comparison, investing in gold does not provide any yield or income.
There are obviously cavates to this, like an ETF or mutual fund that tracks the price of gold or precious metals. These funds can actually pay a dividend to return value to shareholders, but it's not to the same level that you might see in a REIT or MLP, or even a consumer goods company.
3. Gold is prone to price volatility
This one seems counter-intuitive since gold is the "ultimate store of value," but the price of gold has been a fickle bitch over the last few years. The price of gold can be highly volatile, and it is not uncommon for the price to fluctuate significantly over short periods of time. Since 1975, the price chart for gold has looked closer to a ride at Disney World than an asset chart, and this volatility can make it difficult for investors to determine the value of their gold holdings and to make informed investment decisions.
4. Gold is not necessarily a safe haven asset
Despite its reputation as a safe haven asset, gold may not provide the stability and security that investors expect. For example, the price of gold can be impacted by a variety of factors, including economic conditions, geopolitical events, and central bank policies. Since President Nixon axed The Gold Standard in the United States in 1971, it's not even pegged to the U.S Dollar anymore. As a result, the value of gold may not always hold up in times of economic uncertainty or market turmoil.
5. Gold may not provide diversification benefits
While diversification is an important component of any investment portfolio, investing in gold may not necessarily provide the diversification benefits that investors are seeking. This is because the price of gold is often correlated with other assets, such as stocks and bonds, and may not provide a hedge against market volatility.
6. Gold may not be the most efficient use of capital
Given the low yield and potential volatility of gold, investing in gold may not be the most efficient use of capital. There are a variety of other assets, such as stocks, bonds, and real estate, that may offer a higher return on investment and a more stable stream of income. If you're a young person relying on the gold in their portfolio to guide them into retirement, you're going to have an extremely bad time.
7. Gold may not be easily accessible or liquid
While gold may be widely available and traded, it may not be the most easily accessible or liquid asset for investors. For example, investing in gold may require the purchase of physical gold, which can be inconvenient and costly to store and insure. In comparison, investing in stocks or bonds can be more convenient and liquid, as these assets can be easily bought and sold through brokerage accounts.
In conclusion, investing in gold may not be the best idea for a variety of reasons. Gold is not a productive asset, has a low yield, is prone to price volatility, may not be a safe haven asset, may not provide diversification benefits, may not be the most efficient use of capital, and may not be easily accessible or liquid. While gold may have played a role in investment portfolios in the past, investors may want to consider other assets that offer a higher return on investment and a more stable stream of income.
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