Why Investing in Gold isn't a Good Idea

Buying gold as an investment -- good or bad?

There is a huge portion of financial media that fixates on gold. The most common argument you’ll see is that gold is a hedge for economic collapse – gold is seen as a safe place to store money because it’s been used as a form of currency for thousands of years.

That history, plus gold’s global appeal and limited supply sells a lot of people on the value of gold as an investment. But is it actually a good idea?

As an investor, you’re looking to buy something that will be worth more in the future than it is today. To measure that, a lot of people will look at the “intrinsic value” – or the inherent worth of a company, property, or asset.

Most of this analysis will look at the money the potential investment over time might generate

In the case of a company, you’d look at the expected profits the business would generate over time. As a shareholder, you’re a part owner of the business and so your stock entitles you to a sliver of those earnings. For a business that is growing over time, earnings should go up, and the value of your piece of ownership should follow.

What’s tricky about gold is that as an asset, it doesn’t actually generate cash. The piece of gold you own today will be the same piece of gold 5 years from now, no more and no less.

If you buy a house, you can decide to rent it out, and over time the rental payments you receive could provide a steady flow of cash. Alternatively, you can live in the house and instead of paying rent month after month, you would be making mortgage payments and building equity over time in an asset that is capable of creating cash flows.

On its own, gold can’t generate cash, which makes it harder to value.

The value of gold is really tied to its scarcity – that gives it value in the jewelry market and it makes it useful as a store of value and means of exchange.

Some of you probably heard that and thought “what the heck does that mean?”

Globally, gold is recognized as a precious metal, and that worldwide recognition means it readily can be exchanged across borders and cultures, which is part of the reason why major institutions like central banks maintain gold reserves.

It’s also why some investors want in on gold.

They view it as a hedge against economic instability and inflation. Paper dollars, like the US dollar are “fiat currency” -- meaning they have value because we say they have value -- sound familiar?

So, if events unfold that lead people to question the value of a fiat currency, OR the government takes actions that change the value of a currency -- like printing waaaaay more bills and giving them out to people -- the currency can lose value. If a currency loses value, the relative value of gold, as expressed in that currency, will shoot up, allowing investors in gold to profit.

Some people keep money in gold because it is less tied to any one government and isn’t as impacted by inflation or an economic collapse in any one country.

But it’s merit as an investment really depends on the timeline you’re looking at.

From September 2008 to August of 2011, the price of gold went up over 100% while stocks in the US eeked out 1% gains on a total return basis.

There’s money to be made investing in gold, but it comes down to being right about gold at the right time -- because gold tends to surge in value when major financial systems are struggling.

Since September of 2011, stocks have returned over 180% on a total return basis while the price of gold has fallen nearly 30% AND the returns of the S&P 500 trounce those of gold on a 1,3,5, and 10 year basis.

And for people with a very long time horizon, since 1990, The S&P 500 has posted 1,400% gains on a total return basis. Over the same nearly 30 year period, gold has returned 220%.

If you are worried about an economic downturn, it may make sense to have a small portion of your portfolio in gold, but it certainly shouldn’t be your main investing strategy, and for many time periods, you’d be better off being all in stocks.

------------------------------------------------------------------------
Subscribe to The Motley Fool's YouTube Channel:

Join our Facebook community:
Follow The Motley Fool on Twitter:

[satchmccarthy]

Gold when this video came out: $1200/oz


Gold now (not even a year later): $1700/oz

[slamblamboozled]

I think of gold more like insurance, rather than an investment. I think a lot of people have the same mindset, it's not about turning a huge profit, it's protecting what you already have.

[The_High_SeAs]

People don’t understand gold is not for investment to make money. It’s purely useful to hedge against economic instability/ inflation.

[TheFoodReviewGuy]

A lot of precious metal collectors or stackers like myself aren’t doing so just to hopefully get more in return when we sell it. Many, and I like to think most stackers stack to not see gold and silver as an investment but rather as an asset or tool that will preserve our wealth, as oppose to hoarding fiat currency that quite literally isn’t worth the paper it’s printed on as the value of the dollar consistently weakens every year or so.

[sophia]

Most people view gold as a way of protecting their money not as an investment.

[nicksofialakis]

When they telling you don't buy gold it's also the right time to buy as much as you can...

[HazzaripHD]

How is gold a bad investment when it's all banks want? 🤔

[mbansjddbsj]

Going to say what everyone else says about gold...its not investment, it's a hedge against inflation.

[PeterWDunn-offs]

Comparing gold to the stock market and not to the value of the dollar is problematic. Gold is not an "investment" but a store of value. So now, I suggest we compare gold to a savings account over 10, 20 and 30 years.

[baybiibotta]

most of theses people who I see saying that gold isn't a good investment are usually just basing it on our current economic system and doesn't focus on things that may happen in future times

[jlong]

He is correct that gold is not for investment!! GOLD IS INSURANCE AGAINST THE DOLLARS!!

[tobybrown]

Does anyone know how much fiat currency is being printed every day to hand out ? Gold will be king in a matter of years

[rodneykasputtis]

Gold silver can be a fun way to save for the future that is 100% physical and held by the owner

[azmike]

Having gold is a great savings vehicle.
Right now, gold is a good thing to have.
10 years ago, not so much. The dollar is dead. Not much time left.

[victorc.]

Gold is not an investment. It's a way to stop losing money to inflation. We all need savings regardless of investments.
Why not save it in gold?

[vawt]

In 2001 gold was 250 per ounce it’s at 1710 today that 684% in crease if you invested 50, 000 back than it would be 342, 000 today don’t see how that a bad investment

[cryptoflip]

Dude, r u serious?? stocks is about to plummet and Gold acts as an insurance to preserve your wealth when stock market crashes.

[mickygarcia]

How does it feel to be so tragically wrong?

[tjeanneret]

My mother tong is French. I can understand what you say, but it would be much easier without that music, it is by far too loud. Thanks for the next time !

[stevelee]

Gold is not an investment .. its a hedge