Gold As An “Investment”
With Covid-19 dragging on and the central banks printing money like crazy, I’m sure investing in gold has crossed your mind once or twice. Buying gold, a perceived safe haven and hedge against inflation, sounds like the logical investment to make during these times.
After all, the use of gold dates back over 3,000 years. Egyptians used it to make jewelry, ornaments, decorations etc while gold was plentiful. It was first known to be used as currency going back to 700 BC when the Lydian empire produced coins to trade goods and services.
We held on to that practice until countries started moving off the gold standard to finance wars or in America’s case, to get out of the great depression. To this day, central banks around the world still keep reserves to protect them from a financial collapse. This, in turn, causes the public to feel the same sense of security and trust in this shiny yellow metal. But should gold be seen as an investment?
Using it to hedge
Lets start with the hedge argument. It is no secret that global currencies will continue to lose value as central banks keep printing more money. Lately they have been printing a lot of it causing people to rush into gold. And sure, gold performs well in situations like this. But big tech giants like Amazon and Microsoft have also benefited from the government printing more money. And if you bought those companies 10 years ago, you could buy a whole truckload of gold bars!
Besides, if you really want to bet against the US economy, would’t it just be easier to buy put options? Or buy defensive consumer stocks like Proctor and Gamble or Pepsi?
Doesn’t produce or pay a dividend.
This is the BIGGEST reason why I would never own gold. I want to be paid when I own a stock and I would expect that with any other kind of investment. Either directly via dividends or share buybacks. It doesn’t matter.
With gold, you can’t rely on this. You just have to sit and wait for the asset to appreciate in value. How are you going to pay yourself back if this speculative investment turns out profitable? Hmm… Maybe sell off some gold bars? How convenient.
What About Holding Costs?
Ok so you bought a shiny yellow bar. Now what? Now you have to store it somewhere. Oh, and let’s hope it’s somewhere safe so you have one less thing to worry about besides the cost. But storing it is not the only cost. There are also transaction costs eating away at your non-producing asset.
So it doesn’t pay you AND you have to bear the costs associated with holding and trading it. That alone should be enough to not want to own it.
Gold performance vs stocks
Say what you want. Stocks have clobbered gold in the past 100 years. Just take a look at this chart(blue line is the dow jones index).
There’s a lot of gold bugs out there trying to sell the prediction that the US economy will collapse and you need to stock up on gold before it’s too late. Of course, people like Peter Schiff have been wrong for decades.
I will always prefer equities. Not only because stocks have outperformed gold over time, but you know exactly what you are buying into when you buy a stock(or at least you should).
You can make forecasts, analyze a companies business model or financial statement. You are in more control of your investment and have a better understanding of what you can expect when you invest in a real company.
Gold is a commodity with a value thats only determined by what people think it is worth and has a lot less to do with actual supply and demand. This is why gold will never have a place in my portfolio.