Gold was once the backing of most historical currencies. Once it stopped being used as currency, it was seen as an investment, but is it a good one? Should you invest in gold?
For now, I’ll just focus on investing in gold, however, this could be adapted to silver, platinum, palladium or really any other type of precious metal.
Reasons to Invest in Gold
There are several reasons why you should invest in gold, these include:
Diversification
As an investor, when you invest, you never want to have all of your eggs in one basket so to say. As such, we often try to buy several stocks, or real estate in several different locations, however, we make sure not to over diversify.
To diversify, we also buy assets such as gold and/or silver. This is because, whether you are a real estate or stock investor, gold has absolutely nothing to do with your other investments.
History has also shown that when it bad for stocks/real estate, it has been good for gold and vice-versa. This means that it is seen as a very good way to counter a recession or market correction.
And for an investor, diversification is what keeps us safe. IN this case, gold is what may keep us, and our entire portfolio safe.
At the end of the day, that is what matters most to an investor, not what they’re investing in.
It’s Tangible
Stocks are considered intangible assets- you can’t feel them, you can’t see them etc. Just as with real estate, gold and other precious metals are tangible.
For some, this makes precious metals one of the best investments- unlike a stock portfolio, you can’t hack gold. Unless someone steals your gold or you sell it, you will always have it, without fail.
What does this buy, you might be asking? Security. When it comes to investing, everything you do, from diversifying to actually investing in the first place, everything is done for security.
History of Holding its Value
What does Ancient Egypt, the Dark Ages and 1900 all have in common?
Gold.
Throughout time, gold has been used as a currency in some form or another. What your Dark Age ancestors saw as being worth the equivalent of $100 in terms of the quantity of gold, is worth $100 today.
Gold from 500 years ago is still in as good a shape as it was, the day it was minted. Throughout history, in famine, in drought, in whatever, gold has always been worth the same.
This is unlike any other currency, investment, stock or anything else ever seen in human history! If you buy gold today, forget about it for ten years and sell it, you won’t loose money on it for sure!
Immune to an Economic Collapse (Sort of)
History shows us that every 10 years or so, the stock market crashes. This has a negative affect on almost all other types on investment, from real estate to bonds to commodities (oil etc.)
Gold, however, stands apart from that. During times of economic struggle, think the Great Depression or Financial Crisis of 2008/09, gold prices surge. At a time when stocks crumble, gold is never better.
Plus, when the dollar, pound and euro are all weak, it pays to have another currency in your possession, even if that currency hasn’t been used for 50 years- people, even children perceive gold as having intrinsic value.
With that being said though, during times of economic prosperity- when stocks and real estate are doing best, gold is usually not doing to well.
Supply is Diminishing
Precious metals like gold are finite on this planet- only a certain amount of these various precious metals exist.
Humans have been mining for these precious metals for centuries.
As such, their supply is diminishing year on year. And as with anything that is becoming harder and harder to find each year, it is getting more expensive year on year too.
Whilst this may seem like a bad thing to begin with- buying precious metals today is more expensive than it was last year, it is actually quite beneficial for you as an investor.
If you were to buy some precious metals today and sell them a year today, you’d likely make a substantial profit (assuming that the market doesn’t crash too dramatically).
Increased Demand
It’s not just the diminishing supply that is making the price of gold skyrocket, more people than ever are buying gold as well!
This is also a major factor in the recent increase in price.
At first, this may seem like a bad idea- the price of gold is artificially increased, or perhaps it is similar to Bitcoin- just another fad that leaves most people high and dry.
It may also seem as though you’ve already missed out- if everyone else is buying it, it probably seems like a bad idea. However, it is the complete opposite of that!
Just as with the diminishing supply, if you buy precious metal today and sell them this time next year, with the increase in demand, you’ll likely pocket a considerable profit!
Reasons Not to Invest in Gold
With that being said, there are also several reasons not to invest in gold, these include:
The Richest Investors Don’t Own it
When you look at the richest investors, especially those who have started themselves and have invested over their entire lifetime, almost none of them own any commodities, especially not precious metals.
Warren Buffett, arguably the most successful investor of all time, is a big critic of buying commodities, especially precious metals. The same can also be said for people like Charlie Munger and hedge fund managers like Ray Dalio.
Buffett in particular has been asked whether or not you should invest in gold. In true Buffett fashion he has said that whilst you can invest in gold, it is utterly pointless if you want to become a successful value investor.
This anti-gold stance is the result of many different factors. But mainly it comes down to the fact that it is a long-running fad. It is a fad that has been going almost 150 years, and started with the gold rushes- no one ever wins by owning gold.
But, then there’s also…
No Dividend Payments
One of the key tenants of value or rule one investing is that you invest in a stock that pays you every year, in the form of a dividend or a rent payment. However, gold does bring such a monthly or annual payment.
This is the main reason why rich investors like Warren Buffett don’t invest in precious metals like gold. Why invest in precious metals and earn nothing when you could put it in a savings account and earn less than inflation?
Often, many famous investors would rather continue to buy more stocks or real estate that both goes up in value over time and pays them, than buy something that only goes up in value.
In fact, Warren Buffett once quipped that you’d be better off buying bonds than investing in precious metals! *At the time Buffett said that, bonds were seen as a really, really bad investment.*
High Costs
Investing in gold isn’t cheap, at the time of writing, gold is $57 per gram, and if you buy physical bullion, it is a little bit more expensive. Depending on the type of stocks/real estate you buy, that might be more expensive than what you’re used to.
Beyond just the initial costs of buying the gold, there’s also storage. Of course, you could store it at home, but, if you plan on buying a large amount of gold ($1000+), you’ll want to think about proper storage.
Proper storage could be anything from a safety deposit box in a bank, to a dedicated gold vault. Both of which can get pretty expensive depending on the size of the box and where it is located, costing more than $200 per month!
If you buy storage from the bullion dealer you bought your gold from, the storage fee is often based on the value of the gold being stored, usually between 0.5% and 1%.
Coins, Bullion and Jewelry
When you thing about investing in gold, you likely think of investing in bullion. However, there are also two other kinds of gold that you can invest in- coins and jewelry.
For jewelry, the gold is almost useless. “Pure” gold, the same that you get in bullion and coins, is 24 karats. However, for jewelry, the gold is often impure- maybe 18 karats or more commonly nine karats.
For coins, the gold is far more expensive than it’s worth. Coins are often 10% more expensive than their bullion counterparts. This extra 10% is for the time and intricate craftsmanship of the coin, rather than the gold itself.
If you are trying to get into the precious metals market, it’s a commonly known fact that coins are worth it, similarly to how jewelry, whilst pretty, is similarly worthless.
Low Long Term Returns
When you compare precious metals with other investments, such as stocks or real estate, over the long term, precious metals always have a lower return.
This isn’t just on how much they pay- that’s already been established. It’s actually to do with the ROI (return on investment).
The average stock has an average return of about 7%, the average rental property has an average return of about 10%. Gold, on the other hand, averages around 5-6%, much lower than stocks or real estate does.
This causes issues regarding opportunity cost– you are losing out on 1-4% ROI per year. That, coupled with the reasons why Buffett and other investors don’t invest in gold is the reason why most other investors tend to stay away!
The Gold Problem
When you buy gold, you buy it in two forms- physical and certificate. Physical is fairly self explanatory- you buy a physical gold bar or coin or piece of jewelry.
Certificate is the more nefarious of the two. In recent years there have been hundreds of instances of fraud bullion dealers selling fake bullion certificates, leaving people high and dry.
But it isn’t just fake gold certificates that are the issue- it’s how they’re printed. For just one piece of physical bullion, there might be three or four certificates claiming ownership of that piece of gold.
Most of the time, that isn’t going to be an issue. But if everyone who had a certificate turned in their certificates for actual bullion, the whole market could crash… but then the same could be said for cash- it’ just a fiat currency.
Should You Invest in Gold?
There is no right or wrong answer as to whether you should or should not invest in gold. It is simply a matter of perspective and security, more accurately how they pertain to you.
One key detail I have left out of this article: I own a portfolio of physical gold bullion as well as some silver and platinum. For me, I like the security of bullion, but the storage fees are absolutely crazy!
Investing in gold mostly comes down to diversification- something I pride myself on being very good at. I own a portfolio of stocks and real estate predominately, however, my gold portfolio takes up only 2% of that!
Why am I telling you this? Because, if you choose to invest in gold, you’ll only want to have a part of your portfolio in precious metals, and you’ll probably want to have several different precious metals rather than just one.
Always remember to do your research.
Have you ever invested in gold? Tell me in the comments!
