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Gold: Does it belong in your portfolio?
Should gold hold a place in your portfolio? If you happen to watch television or YouTube, you would likely assume so, given the countless advertisements that air:
BUY GOLD NOW!
GET YOUR AMERICAN EAGLE GOLD COINS FOR ONLY FOUR EASY PAYMENTS OF $X!
GOLD GOLD GOLD!!!
(Heck, it might even have been Robert Kiyosaki, the co-author of Rich Dad, Poor Dad, advocating for gold in your portfolio!)
Therefore, with such a plethora of voices cheering you to buy gold, it would be easy to believe it holds a place in your portfolio. However, such an assumption would be wrong.
And Bitcoin, the digital gold, doesn’t have a place either, yet. (I have written about such previously and remain unchanged.)
Gold is not an investment, and therefore it does not belong in your portfolio. Why? Let’s find out by heating up this conversation and melting down the argument to find an answer!
What is an investment?
To understand why gold is not an investment, we must first define what is considered an investment.
Investment (in-vest-ment): An asset that creates a future profitable income source either through holding and/or selling it. Popular examples of investments include stocks, bonds, and real estate.
Notably, investments create value that we not only store our wealth in but increase it through.
For example, stocks, as a whole, have appreciated with time, protecting against inflation and generating income for shareholders. Bonds, too, have appreciated and provided interest income to their lenders.
Gold, however, sits in a safe and waits. And waits, ever glistening. It is not used to raise capital for the expansion of manufacturing capabilities or to fund rapid growth. Instead, gold could care less of the affairs of man, transferring hands with ease as if it were slippery given a chance.
But gold stores value!
Gold is a storer of value, but only when holding it for a century or more. Otherwise, it is a suboptimal tool akin to gambling. While it may cost X today, gold will most certainly cost Y tomorrow. And as to whether Y is worth more or less than X is anyone’s guess.
Moreover, contrary to popular opinion, scientific analysis has shown that gold is not a safe haven. Therefore, if you are looking to invest or store value, choose an asset class that is proven to do so, such as stocks, bonds, or real estate.
Yikes, well then what?
I know gold is one of the oldest treasures known to man, with countless wars fought over the eons in its pursuit. However, despite its glistening appeal, it should be avoided if you want to see a profitable return. Instead, consider investing in a diversified portfolio that uses total market index funds for exposure to domestic and foreign stocks, with an allocation to bonds if you want to be conservative.
Nevertheless, gold could be something to buy, if and only IF you want to insure against the unimaginable. If you genuinely believe a societal collapse could occur, rendering dollars useless, then you should hold enough gold to help you escape the country, but nothing more.
Why? Well, gold is heavy, so good luck carrying more than a small amount. And secondly, gold is easily recognizable and stolen; thus, you only want enough to hide in your clothing to escape the country and start a new life. But remember, such an event is highly improbable. In such an event, I will be more concerned for what my next hour holds, not what my portfolio is doing. Notably, I do not expect such to happen, so I will not be holding gold.
Oh, and one more thing, just because of everything listed above, feel free to buy jewelry that contains gold. While it is not likely going to be worth what you paid for it, like a new car once driven off the dealer’s lot, some people derive enjoyment from wearing it.
If this is you, who am I to judge? Buy what brings you value; that is the point of financial discipline, after all! For some, such includes exotic travel, and for others, it is the simple things. Everyone is different, don’t judge!
As always, have a great day!
FAQs
Is it a good investment to invest in gold?
Generally, gold should not be viewed as an investment. Instead, it is an alternative asset that can fluctuate substantially and does not always keep up with inflation.
What is the best way to invest in gold?
If you decide you want to invest in gold, using an ETF like GLD is likely the better option compared to holding the physical metal due to the costs involved of purchasing the metal. Still, gold carries high risk and should be viewed as an alternative asset class and not an investment.
What is the safest way to buy gold?
Through a reputable dealer or through a mutual fund or ETF. Purchasing through these routes ensures you are likely to receive a fair price.
Should I own physical gold?
Owning physical gold is an expensive and risky proposition compared to buying it as an ETF or mutual fund. Physical gold has many fees associated with its purchasing and selling, and is easily stolen and difficult to recover after a burglary.
What are the disadvantages of gold?
Gold does not protect against inflation unless held for periods exceeding 100+ years. Further, investing in it is a gamble that has no guarantee of paying off. Lastly, purchasing physical gold has high fees that can eat into any profits.
Why is gold so important?
Gold has remained a metal that captures human desire due to its lustrous color. Further, it is an important metal when used in the production of electronics and jewelry. However, that does not make it a good investment. Gold should be relegated for jewelry or collectible purchases for the everyday person.
Mile High Finance Guy
finance demystified, one mountain at a time
Never was a believer in gold; it’s hard to see its value once it was de-coupled with the USD. I think gold/silver are really not good investments anymore because they are essentially just commodities as opposed to something that has fundamental store value.
I know Kiyosaki and Peter Schiff are like permabulls on gold, but I think they’re living in the wrong era. If one would bet on gold, they might as well speculate on other commodities that are more volatile like Palladium.
But speculating on commodities require immense amount of domain expertise, and even then you might still not get the result you want in the time horizon you want. Example: I speculated on palladium shortages in China back in 2020 due to some new laws they were passing for cars. But then COVID hit and thus cars were not as in demand in China. So that ended up having to be held for a long time despite having a reasonable thesis.
I agree with you that Kiosk and Schiff are living in the wrong era and that commodities speculation is anything but worthwhile. It still boggles my mind that people take them seriously!