Should I buy Gold?
Buying Gold when its price is rising can be profitable – and even when it’s not, it’s a great vehicle for hedging against economic volatility. As you might guess from our website content, at Satori Traders we think Gold’s pretty great.
But there are two sides to every Coin, Gold Coins included. So, today we’re going to hike down the road less traveled and ask: “Should I buy Gold?” and “Why should I not buy Gold?”
Without further ado, here are 8 reasons why physical Gold is not a good Investment – and 8 counter arguments for why Gold is a good Investment.
Table of Contents
Downside #1: Valuation StrugglesDownside #2: Gold Produces No IncomeDownside #3: Relatively Limited UtilityDownside #4: Gold is Overbought During DownturnsDownside #5: Abysmal Long-Term Returns
Downside #6: Gold is an Inefficient InvestmentDownside #7: Unfavorable Capital Gains TaxesDownside #8: Gold’s Status as an Inflation Hedge is…debatableShould I buy Gold, or Why Should I Not Buy Gold?
Downside #1: Valuation Struggles
One of the biggest challenges with investing in Gold is putting a value on the metal itself. Sure, the nebulous “market” will tell you how much Gold sells for – but what’s it actually worth?
Well…it’s hard to say.
The metal’s value isn’t based on underlying performance like Stocks, nor is it a loan with institutional backing like Bonds. It doesn’t generate interest or percolate in the markets like the Dollars invested in your Retirement accounts do.
In other words, Gold’s value is based purely on what “the market” is willing to pay. Historically, that means its price rises during certain crises, then deflates, holds steady, or grows slower when said crisis passes.
Unfortunately, that makes it impossible to determine a “true” value.
Counter: Supply Constraints
Gold is a relatively rare metal. In fact, all the Gold ever mined – some 250,000 metric tons – would fit inside a cube that spans 75 feet on each side. Global mining operations add just 2,500 to 3,300 metric tons to the pile annually. (For reference, Silver’s estimated global production in 2021 alone equaled 24,000 metric tons.)
As an investor, that’s good news. Even if the market slumps, supply constraints will ensure Gold doesn’t fall too far – not for long, anyway.
Downside #2: Gold Produces No Income
Another reason why physical Gold is not a good Investment is that, like cash, it produces no interest or dividends. The only profits come from selling the metal for a profit. Gold also carries an opportunity cost – that is, the interest you could have earned from income-producing Investments in the meantime is gone forever.
That further ties into the difficulty of evaluating Gold’s “true” price. Due to a lack of producing dividends or income, it’s only worth what “the market” says it’s worth.
Counter: Easy to Liquidate
Typical Gold Investments come in two forms: Bullion and Coins. Both are easy to buy, access, carry, and sell. Though you may not always see a profit, you can always sell out in a pinch. Short of holding physical cash, the ability to liquidate Gold Investments is unparalleled.
Downside #3: Relatively Limited Utility
Gold, like Silver, has industrial applications in electronics: primarily computers, spacecraft, and even jet engines. Beyond these, Gold’s utility is largely constrained to Coinage and jewelry – both applications that have declined in the last half-century. Simultaneously, Gold is more valuable than Silver, and continues to be mined annually (albeit in far smaller amounts).
In other words, Gold’s inventory is always increasing despite little risk of being “used up” in industry. That supply overhang makes buying Gold risky in many economic environments – and constitutes another disadvantage of Gold.
Counter: Relatively Stable Industrial Demand
Though Silver is more electrically conductive than Gold, Gold is softer, more chemically stable, and able to block certain light wavelengths. That makes it ideal for certain industrial uses – especially sending electronics to outer space. Though demand is somewhat limited, it’s also fairly stable, ensuring a steady supply will be needed for the foreseeable future.
Downside #4: Gold is Overbought During Downturns
Gold’s value often soars during economic downturns – but not because the metal does anything spectacular. Rather, investors rush to add Gold to their Portfolios when recession, Inflation, or deflation appear on the horizon.
These speculative spikes inflate Gold’s price, even if the yellow metal was previously sliding. The pattern also starkly highlights just how much Gold’s value is tied to investor enthusiasm.
Unfortunately, speculation and its accompanying sentiments aren’t sustainable for investable assets. As history reminds us, when demand soars high and fast, a correction typically looms in the near future.
Counter: Gold Remains Desirable Year-Round
Despite Gold’s reputation during downturns, the yellow metal is still desirable.
In countries like China, Gold is a traditional savings vehicle, keeping demand steady.
India’s wedding season is renowned for bolstering demand year after year as brides incorporate the shiny metal into glamorous adornments.
And around the world, investors have begun adding Gold-backed ETFs (exchange-traded funds), Trusts, and Gold IRAs (individual Retirement accounts) to their Portfolios to hedge against downturns year-round.
Downside #5: Abysmal Long-Term Returns
It’s well-known that the price appreciation of Gold doesn’t keep pace with Stock market returns long-term. What’s less well-known is the pure size of those disparities.
For instance, between September 1922 and September 2022, the price of Gold rose from $371.83 to $1,660.88. (On an Inflation-adjusted scale.) That amounts to 347% in profits over a century.
By contrast, if you’d invested $100 in the S&P 500 in January 1922 and left it, the same Inflation-adjusted scale would produce $2.3 million in profits by January 2022. In other words, your Investment would return 131,600% over a century – 379x higher growth than Gold.
It’s also important to consider how Gold’s value fluctuates with interest rates, as interest rate changes often bring Goldbugs out in force. According to Robert Johnson, principal at the Fed Policy Investment Research Group, between 1972 and 2013, Gold futures returned:
- 4.86% in rising rate environments compared to 8.47% stock returns
- 7.85% in falling rate environments, compared to 14.68% stock returns
- 8.61% in flat rate environments compared to 10.61% stock returns
Or, put another way, the New York Times found that Gold returned just 1.1% between 1836 and 2011. By comparison, stocks returned 7.4% in that same period.
Oof.
Counter: Gold Holds its Value
The simplest argument to Gold’s lack of long-term returns is that Gold isn’t intended to produce profits; it’s designed to hold its value. Unlike regular currency, Gold maintains a relatively high value in the vast majority of economic climates. Sure, it has its ups and downs – but when the chips fall, Gold is there to buoy your balance sheet.
Counter: Nobody invests for 100-year periods
Evaluating Gold’s performance over a 100-year time period is interesting but also misleading. The typical investor has a 40-year window in which to invest their savings and reap the benefits of their Investments. When we look at shorter time frames Gold and the Stock market compare more favorably. There are even periods like the 1970s when Gold significantly outperforms Stocks.
Downside #6: Gold is an Inefficient Investment
Another reason why physical Gold is not a good Investment is that it comes with several added costs. As a physical asset, you have to have the space and cash to securely store and insure your Gold. That goes for Bullion, Coins, and Gold jewelry alike. Even when you invest in a Gold-backed ETF or Trust, you’ll pay maintenance costs which are deducted from the Investment vehicle. Gold IRAs also have expenses which cover the cost to store and insure the physical metals.
You also have to consider the bid-ask spread on Precious metals Investments – particularly Coins. The difference between the bid and ask prices is an expense that you will ultimately pay.
Since many Coins come in “specialty” runs, they often carry added value as collectors’ items. As an investor, this can increase your costs to purchase some kinds of Gold. (Not to mention complicate the sales process down the road.)
Counter: Gold Isn’t the Only One
Other Investments also come with added costs on top of their “true” value. For instance, most ETFs, Mutual funds, and similar Investments carry expense ratios. That’s just a fancy term for “what the broker charges to maintain your account and turn a profit.”
However, many Gold IRAs and Gold ETFs carry expense ratios at or under the price of “traditional” funds. For instance, the SPDR Gold Shares ETF charges just 0.40%, or $40 for every $10,000 you invest. The iShares Gold Trust is even cheaper – just 0.25% annually.
Some investors claim that Precious metals Investments are too expensive but they often fail to acknowledge the overhead costs of investing in Stocks and Bonds. Mutual funds typically have management costs of 0.40% to 2.0% depending on the amount of human oversight the Fund receives.
Downside #7: Unfavorable Capital Gains Taxes
In the U.S., investors enjoy lower capital gains taxes on long-term Investments (those held over one year) compared to short-term Investments.
Unfortunately, Gold is usually taxed as a collectible, subjecting profits to a hefty 28% tax instead of 0%, 15%, or 20%. Doubly unfortunately, most Gold-holding Investments (such as ETFs) aren’t exempt from Uncle Sam’s demands.
If you’re looking at the disadvantages of Gold, that one’s hard to beat.
Counter: Gold IRAs Lessen the Sting
Gold IRA investors may be able to delay or even sidestep the Gold collectibles tax altogether. Capital gains on Precious metals in an IRA are taxed as regular income, not the 28% rate for collectibles.
In a traditional IRA, you can put off these taxes on profits until you make eligible withdrawals in retirement.
In a Roth IRA, where you pay taxes before contributing funds, you may not ever have to pay taxes on your profits. (Assuming you make only eligible withdrawals.)
Downside #8: Gold’s Status as an Inflation Hedge is…debatable
When people say that Gold is a great hedge against Inflation, they’re not wrong. Unfortunately, they’re not exactly right, either.
Studies show that Gold hedges against Inflation only sporadically. For instance, between 1973-1979, when the U.S. faced massive Inflation, Gold soared over 30%. But between 1980-1984, and again between 1988-1991, Gold actually lost between 8-10%.
In other words, Gold’s ability to hedge against Inflation depends entirely on the surrounding economic environment. (Not to mention investor proclivities.)
Counter: Gold is an Ideal Crisis Commodity
A better way to state Gold’s Inflationary protection is that it can (but doesn’t always) hedge against crisis. When economies swing into political or financial crisis, Gold may over- or outperform in powerful ways. Often, the highest price hikes occur when investor and consumer confidence in local governments plunges.
Should I buy Gold, or Why Should I Not Buy Gold?
Let’s be honest: the disadvantages of Gold are many. But it’s important to put those downsides into context – specifically, by comparing Gold’s potential against your total Portfolio holdings.
Generally, experts recommend limiting your total Precious metals exposure to just 5-10% of your Portfolio. That means you have plenty of room to invest in Gold without risking the bulk of your Portfolio.
And when the Stock market inevitably crashes again, your Gold holdings will be there to catch you on the way down.
This diversification and Portfolio hedging adds safety to your long-term financial plans which suggests that the answer to the question, “Should I buy Gold?”, is “Yes!”.
As you consider your options for investing in Gold, reach out to one of the Gold IRA companies and take advantage of the resources they offer. Goldco has extensive educational material that they will send you and they also have Precious metals experts available to answer your questions.
About Satori Traders
Satori Traders LLC is a California-registered Investment Advisor specializing in the Precious metals.
Bryan V Post is a California-registered Investment Advisor Representative and the founder of Satori Traders.
Bryan has worn numerous hats during his life: Engineer, Portfolio manager, Precious metals Investor, Technical analyst, Proprietary trader, Swing trader.
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