Why is Gold not a good Investment?
When the economy crashes and traditional Investments bleed value, investors and Goldbugs alike hop into the most famous yellow metal around. But whether buying Gold is a good idea or not is hotly debated among economists, investors, and Precious metal enthusiasts.
Naturally, at Satori Traders we think that Gold’s pretty great, given that we offer Gold IRAs and all. But just because Gold can be a good Investment doesn’t mean that it always is. Plus, it’s absolutely true that Gold, like any other asset, isn’t an appropriate Investment for absolutely everybody.
That’s why we’re asking an essential question in this essay: why is Gold not a good Investment?
In answer, we’ve compiled 7 reasons not to buy Gold to help discerning investors recognize its flaws alongside its values.
Table of Contents
#1: No One Knows What It’s Worth
#2: Gold Only Has So Many Uses
#3: Gold Doesn’t Earn Interest
#4: Gold’s Long-Term Returns Are…Questionable
#5: Gold’s Value is Highly Dependent on Investor Activities
#6: The Taxes, Frankly, Suck (Your Profits Down the Drain)
#7: Owning Gold is ExpensiveWhy is Gold Not a Good Investment? Oh…Lots of Reasons
#1: No One Knows What It’s Worth
How much is Gold worth?
No, not in a pawnshop or on a specialty dealer’s website or made into fine jewelry. If you were to price Gold in a vacuum, what’s the metal itself worth?
What, you can’t answer that?
Well, you’re not alone.
Gold is unique in that its worth isn’t built on contractual obligation or underlying business performance like Bonds or Stocks. Nor does it provide shelter, land value, or rent like Real Estate. It doesn’t even derive its value secondhand like futures contracts do.
Instead, Gold’s value is based on capitalism’s defining principle: supply, demand, and buyers’ willingness to part with their cash. And as it turns out, there’s only so much that scarcity can do to prop up a non-essential commodity’s price.
That’s not to say Gold is useless. Its unusual metallic profile makes it ideal for certain industrial purposes, and it’s commonly found in high-end jewelry and artwork. Even there, however, Gold’s valuation remains murky at best.
Unfortunately, that means when the market decides the Precious metal is “overvalued” for whatever reason, you can lose hundreds of dollars per ounce overnight.
Sure, this kind of volatility is expected in Stocks and Bonds. But when it comes to Investments designed to hold value long-term, sudden volatility is an unattractive trait.
#2: Gold Only Has So Many Uses
Consider Steel, or Aluminum, or Copper. You see these metals melted and molded around you daily, from conductive wiring to streetlamps to kitchen trays.
By contrast, seeing Gold is far less common. Most people’s contact with the yellow metal is limited to jewelry, Coins, or minute dustings in their electronics.
If you’re a space nut, you might see images of Gold foil lining satellites and other spacefaring vehicles. Other uses are even more niche, or else relegated to the rich who can afford Golden luxuries.
This startling lack of common utility contributes to two big reasons not to buy Gold.
First, despite Gold’s relative rarity, the global supply isn’t at risk of being used up. In other words, there’s no massive demand-side pressure to support the metal’s price through downturns.
Second, because Gold is readily replaceable for most industrial uses, companies and individuals often turn to cheaper alternatives when the economy falters. That further lowers demand, which tamps down prices and can even force mines to artificially inflate prices by reducing production.
#3: Gold Doesn’t Earn Interest
Gold shares a few similarities with cash. For some, that’s damning enough evidence for why Gold is not a good Investment.
One big similarity is that Gold doesn’t produce anything – no interest, no dividends, no profits of any kind. The only time you’ll see a return on physical Gold is when you sell the metal for a profit. (If you can turn a profit, which isn’t a guarantee.)
That means that, as an Investment, Gold carries a massive opportunity cost. In other words, while you tie up cash buying Gold, you’re also losing out on the potential interest, price appreciation, and other capital gains potential that income-producing Investments provide.
Think about it this way: If you buy an ounce of Gold, in ten years, you’ll own one ounce of Gold.
But say you buy one share of dividend-paying stock instead. In ten years, you could own five, ten, even fifty shares. This is made possible through dividend reinvestment plans that let you convert dividends into more stock. Stock splits, which divide shares to lower the per-share cost, can also increase your holdings.
In other words, non-Gold Investment can enjoy growth opportunities that physical assets just can’t match.
#4: Gold’s Long-Term Returns Are…Questionable
History shows that investing in a diversified Stock Portfolio can net 7-10% in average annual returns over time. Even less-profitable Bonds have historically returned 4-6% per year.
That’s not to say that these returns are guaranteed – they’re averages over decades. For instance, in 2008, the Dow Jones Industrial Average lost almost 34%. But in 2013, the same index returned nearly 27%.
But even compared against such choppy performance, Precious metal returns can’t compare, leading to one of the biggest negatives of investing in Gold.
The Precious metal saw its greatest annual return in 1979 when its price soared 133% amid sky-high inflation and recession fears. But the metal has also seen long periods of decline and stagnation.
For example, consider Gold’s inflation-adjusted peak of $781.06 in April 1934. After topping out, the metal embarked on a decades-long journey of losses and minor gains. The metal wouldn’t see that inflation-adjusted price again for forty years, until it broke its dry spell at $803.46 in June 1973.
In other words, if you’d bought Gold in 1934, you would have suffered four decades of lost value and opportunity costs as Gold failed to keep pace with, let alone exceed, price inflation.
Look at it another way. Between 1836 and 2011, Stocks generated annual returns around 7.4%, while Bonds returned around 2.9%.
But Gold? Well…Gold returned just 1.1% on that extended timeframe.
#5: Gold’s Value is Highly Dependent on Investor Activities
You’ve likely heard that Gold’s great power is its ability to cling to value when the economy sours. That’s true – but not because Gold itself has some recession-eating superpower. Simply put, Gold can (but doesn’t always) grow more valuable because investors want it to.
When economies or markets dip, investors shovel Gold into their Portfolios. This speculative rush spikes demand, which drives up Gold prices. For investors who buy early and sell at the peak, these events can be massively profitable.
But for most other investors, this sudden volatility is one of the less welcome negatives of investing in Gold. Ultimately, frenzied speculation just isn’t sustainable. When the dust settles and the markets return to normal, Gold’s price typically falls – sometimes below where it started.
#6: The Taxes, Frankly, Suck (Your Profits Down the Drain)
U.S. investors are generally required to pay one of two kinds of capital gains taxes. Short-term capital gains are levied when you profit from an Investment you’ve held for under a year. These tax rates are generally set at your income tax rate, which ranges from 10-37%.
Long-term capital gains are more favorable. Long-term rates are set at 0%, 15%, or 20%, based on the investor’s tax bracket.
But in most cases, Gold is taxed as a collectible. (Yes, even when you buy a Gold-backed ETF or Trust.) That subjects all Gold profits to a hefty 28% collector’s tax – far higher than any long-term capital gains tax, and well above four of the seven short-term tax rates levied in 2022.
Precious metals IRAs receive more favorable tax treatment. Capital gains on Gold held inside an IRA are taxed as regular income instead of the collectible rate of 28%. In a tax-exempt Precious metals IRA (Roth IRA) there are no taxes on capital gains.
As you explore the pros and cons of investing in Precious metals, look into Gold IRA accounts and how they can benefit your Portfolio. One of the best and oldest Gold IRA companies is Goldco, with over 16 years of experience in the industry. Goldco customers consistently give the company 5-star reviews and talk about the excellent service they received. Goldco provides potential investors (that’s you) with extensive educational resources and they have Precious metals experts on hand to answer your questions. Reach out to Goldco at the link below and grab their free information resources.
#7: Owning Gold is Expensive
If you need a good reason not to buy Gold, look no further than the cost of ownership.
When you buy Stocks and Bonds, you’re investing in “paper Investments.” These aren’t exactly real the way that Gold is. Effectively, you can think of paper Investments as numbers jotted down (or typed) in a nebulous somewhere.
The same isn’t true of Gold – a feature often touted by Goldbugs. Gold is a real, physical asset. You can touch it, lick it, stick it in your pocket, and trade it for goods and services.
While that offers the tangibility some investors crave, it also makes Gold really, really inconvenient. And that inconvenience leads to increased expenses.
To start, Gold owners – whether you prefer to buy physical Gold or shares in a Gold-backed ETF or Trust – need to store the metal. That leads to questions like:
- Where can you hold the metal so it won’t be stolen?
- How do you control Gold’s environment to reduce tarnishing?
- What kind of insurance protects against loss, damage, or theft?
- What’s a reasonable “maintenance cost” to pay someone else to store your Gold?
In other words, owning Gold always comes with extra costs. Home storage requires buying a safe, cameras, and still risking theft. External storage solutions charge more and still require extra insurance to cover your Investment.
Often, buying shares in a Gold-backed Fund is the cheapest option, but you’ll still have to pay maintenance costs. Plus, taking this route means losing the chance to ever physically hold your Gold.
And we won’t even get into the challenges of buying collectible Gold Coins or jewelry – both of which carry substantial markups and reduced profit potential.
Why is Gold Not a Good Investment? Oh…Lots of Reasons
Looking at the list above, it’s easy to see why Gold is not a good Investment. Simultaneously, you might be wondering: why would anyone buy in against these downsides?
The answer is simple: because, for many investors, the pros outweigh the cons.
Gold diversifies a Portfolio and acts as a counter-balance to market volatility. Ideally, Precious metals should take up just 5-10% of your entire Investment Portfolio. At that level, you have enough room to play with Gold as a hedge or profit-generating Investment without jeopardizing your long-term strategy.
Additionally, you should also know how to set your expectations.
Most of the time, you’re unlikely to see Gold make massive leaps in your favor. And, as the years between 1934 and 1973 proved, Gold has enormous downside potential if you catch it at the wrong time.
But if you accept Gold’s volatility and acknowledge its primary potential of storing value and hedging against economic downturns, you can welcome Gold into your Portfolio with ease.
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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