The Real Problem With Gold

It’s not what you think!

By Robert DeVries, MBA, AWMA

I am surprised at how often I am asked about gold as an investment. It’s an easy answer – Don’t do it! Here are four reasons why our wealth services firm in Melbourne thinks gold is not a good investment:

  • Gold’s return has been lower than equities with similar volatility.
    • Over 41 years, from 1973- 2014, the S&P 500 had an annualized return of 11.04 percent versus gold spot price returns of 5.95 percent1. Gold has underperformed five-year U.S. Treasury notes over the last 40 years2.
    • One period of strong performance for gold was under circumstances that cannot be replicated, i.e., the U.S. government dropping the gold standard in 1971 and removing ownership restrictions in 1975.
  • Gold has been disproven as an inflation hedge.
    • Inflation adjusted spot price of gold went from $1 in 1980 to $1.04 in 20113.
  • Gold is a risky way to diversify portfolios.
    • Gold’s benefit of low correlation to stocks comes with volatility similar to small cap stocks, which may offset the benefit of low correlation.
    • The standard deviation over 41 years was over 20 percent, similar to emerging markets indices4.
  • Gold produces no income.
    • No income means the only way to make money on gold is to find someone who is willing to pay more for it than you did.

But the real problem is most people in the United States buy gold out of fear. They think if things go really badly with U.S. currency or with inflation that gold will appreciate in value or be a new form of exchange for goods. But if it was the case that a collapse was driving people to gold, and gold prices were rising, you would be very unlikely to sell for a gain because you also would be fearful.

So the biggest problem with gold is you are very unlikely to sell it when prices for gold are going up. And the only time you would sell it is when you are no longer fearful, which would only be when prices are likely going down. So I ask, what is the use of an asset if you are unlikely to sell when prices are at their highest?

There are other ways to protect against inflation or currency devaluation, including a globally diversified portfolio of low cost index funds that won’t undermine the central purpose of your investments, which is an adequate rate of return in investments with liquidity. Call one of our WealthCoaches at our wealth services firm in Melbourne today for more information on investments with liquidity.

1 “A Difficult Year for Gold and Silver” Mark Hebner. https://www.ifa.com/articles/difficult_year_for_silver_and_gold/

2 “A Difficult Year for Gold and Silver” Mark Hebner. https://www.ifa.com/articles/difficult_year_for_silver_and_gold/

3 “Is Gold Worth Its Weight in a Portfolio?” Bryan Harris. http://www.lowriefinancial.ca/wp-content/LowrieFinancial/2014/05/DFA-Is-Gold-Worth-its-Weight-in-a-Portfolio.pdf

4 “A Difficult Year for Gold and Silver” Mark Hebner. https://www.ifa.com/articles/difficult_year_for_silver_and_gold/

 

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