Why I don’t like gold as an investment
I’ve kicked around writing a post about gold for a long time. Now, sitting in the tire place waiting for my tires to get rotated, I no longer have an excuse for putting it off.
Gold as an investment. People seem to love it or hate it. I’ve read quite a bit about gold from a personal finance standpoint. And despite its recently approaching $1,000 per ounce, I’ve come to the conclusion that investing in gold is not for me. These are my reasons.
It’s not the hedge people claim
Gold proponents love to tout its supposed hedging properties. The thinking goes that gold is a hedge against inflation. After reading several scholarly papers and articles from respectable sources, I believe this to be untrue. Gold, it turns out, is a great hedge against uncertainty. In times of war, political or economic uncertainty, gold performs well. But in times of inflation? Not so much.
I think the belief in gold’s supposed inflation hedging properties comes from the fact that inflation sometimes accompanies these other events. For example, war very often brings with it inflation as government spending crowds out supply. Lower supply, higher prices. So if gold performs well during times of war, it will appear to be a good inflation hedge. Analytically, it just ain’t so.
Gold isn’t the ‘ultimate currency’
In times of catastrophy, the idea goes, you want gold on hand to buy essentials. Paper currency will be worthless in the most extreme circumstances. Gold, on the other hand, is always accepted as payment.
I don’t think so. True, if the world economy collapses, paper money won’t be valuable (or, at least, it will be heavily discounted). But is gold a good substitute in a situation like that? No. Barter, cigarettes, gasoline - these things people will value highly. But gold? I doubt it, at least to the degree those who talk up gold think.
Gold as investment has unfavorable tax treatment
People who like gold as an investment typically don’t advertise how it’s taxed in the U.S. Gold is treated by the IRS as a ‘collectible.’ That means gains in the value of gold are taxed at up to 28% instead of the 15% maximum long term capital gains rate (and many people are taxed at a lower rate yet).
You have to do something with the gold
When you own gold, you have to secure it. This is obvious in the case of owning gold bullion. The big thing now, though, is gold ETFs. But the problem remains. Gold Shares, the biggest gold ETF, still has to keep its gold somewhere and that costs money. That cost is passed on to owners of the fund. Of course all investments have fees associated with them. Just don’t forget that owning gold has a cost, too.
Though I’ve personally toyed with owning some gold, I’ve ultimately rejected the idea. For me, these reasons outweigh any potential upside to gold.
March 10th, 2008 at 9:02 am
Be diversified with a basket of commodities: gold, silver, oil, wheat, etc.
March 10th, 2008 at 1:23 pm
I’m with you on this. When it comes down to it, what can you do with gold? If stuff hits the fan and we’re in chaos, you can’t eat gold, you can’t use gold to heat your house or power a vehicle. How in the world is gold valuable besides the fact that it’s shiny and you can make a pretty necklace for your girlfriend with it?
Thats why I never liked gold as an investment either. It seems like a bubble to me. People talk it all up but its “overvalued” since there is no justification for it’s increase in price.
March 10th, 2008 at 2:41 pm
Gold is one of my biggest personal finance pet peeves. Just because it’s been around for so long doesn’t make it everlasting. Only stupid people will take it in crisis situations where staying alive is a priority. It’s only useful when things are stable or will stabilize again (plus, how do you store it when there’s a crisis?).
March 24th, 2008 at 8:40 pm
Good post. Thank you for a decent analysis. I am very happy to find a well thought out view against gold.
It’s not the hedge people claim
1. Gold is good for times of financial uncertainty. Look at it’s performance around 9/11. It might not be directly correlated with inflation, unless it’s runaway inflation. If the Fed keeps pumping liquidity into the system, that very may well be our fate. Are we not in or heading toward a period of stagflation?
Gold isn’t the ‘ultimate currency’
2. Paper currency is no longer backed by gold. Therefore it’s value can return to zero. Without a limiting factor on the amount of money the FED can print, there is nothing reigning in the liquidity party train. Without a tangible asset to back the value of currency it can lose it’s true value. Gold is a commodity that is rare and therefore historically valuable. In times of financial turmoil, internationally, gold returns to prominence as a store of wealth. True enough, all commodities will do well, at least for the near future.
3. Gold as investment has unfavorable tax treatment
Didn’t know that. Thank you.
4. There decent options for securing gold.
http://www.goldmoney.com is an excellent way. Kitco has storage (for a small fee).
IMHO we are in a long term bull market for gold. There are a number of other factors that will aid the price of gold, in the short and long term.
1. The dropping value of the US dollar.
2. Foreign ownership of debt
3. The ballooning deficit. We can’t inflate it away forever.
4. Subprime. Deflation of the housing bubble.
5. The stock market is over inflated in my opinion.
6. Baby boomer retirement.
Would be very happy to hear your thoughts.