Nobody wants to be the bearer of bad news. Nobody wants to crush people's dreams. But in the world of investing, cold, hard facts, not dreams, are what make you money. And the fact of the matter is, historically speaking, buying gold is the worst possible investment you can make.
I am very sensitive to the fact that what I just said has probably caused some readers to go apoplectic, and for that I apologize. I know that I will never convince the gold bugs, inflation hawks or doomsday preppers of this thesis, nor my own personal position that gold will eventually be worthless. But for the rest of you, let me lay out the case to avoid gold as an investment.
The Numbers Don't Lie
In his seminal book "Stocks for the Long Run," renowned economics professor Jeremy Siegel looked at the long-term performance of various asset classes in terms of purchasing power -- their monetary wealth adjusted for the effect of inflation.
With a $1 investment each in stocks, bonds, T-bills and gold, beginning in 1802 and ending in 2006, Siegel calculated what those assets would then be worth.
Stocks were the big winners, growing the initial dollar investment into $755,163. Bonds and T-bills trailed dramatically, returning only $1,083 and $301 respectively. But the big surprise was in how badly gold fared during that time, only growing to $1.95.
An Inefficient Investment Vehicle
In addition to its miserable historical performance, gold also has many other failings as an investment, not least of which are the cumbersome and inefficient options available to own it and the prevalence of less than reputable salespeople in the precious metals space.
I am very sensitive to the fact that what I just said has probably caused some readers to go apoplectic, and for that I apologize. I know that I will never convince the gold bugs, inflation hawks or doomsday preppers of this thesis, nor my own personal position that gold will eventually be worthless. But for the rest of you, let me lay out the case to avoid gold as an investment.
The Numbers Don't Lie
In his seminal book "Stocks for the Long Run," renowned economics professor Jeremy Siegel looked at the long-term performance of various asset classes in terms of purchasing power -- their monetary wealth adjusted for the effect of inflation.
With a $1 investment each in stocks, bonds, T-bills and gold, beginning in 1802 and ending in 2006, Siegel calculated what those assets would then be worth.
Stocks were the big winners, growing the initial dollar investment into $755,163. Bonds and T-bills trailed dramatically, returning only $1,083 and $301 respectively. But the big surprise was in how badly gold fared during that time, only growing to $1.95.
An Inefficient Investment Vehicle
In addition to its miserable historical performance, gold also has many other failings as an investment, not least of which are the cumbersome and inefficient options available to own it and the prevalence of less than reputable salespeople in the precious metals space.
Owning physical gold in the form of bullion has many drawbacks. Wide bid and ask prices on physical gold ensure that the moment you purchase it you are already underwater on your investment. In addition, shipping costs for the heavy metal will further add to your cost basis.
Once you get your gold, you then have to decide how to store it. Keeping it at home exposes it to the risk of theft, fire or natural disaster. Taking it to the bank requires the rental of a safe deposit box, the cost of which will eat into your profit as well.
Firms will store your physical gold on site, but they charge for the service, and the idea of having your yellow treasure held by someone somewhere else, commingled with that of others, is not very appealing.
Don't Look to the Stock Market for Help
So what about the various gold ETFs –- most notably the SPDR Gold Trust (GLD)? Aren't they a cheap and easy way to own gold? The short answer is "no."
The idea behind these ETFs is to give investors a way to buy and sell gold as simply as they would a stock. But the problem is that when you buy GLD or any other gold ETF, you are not buying physical gold. Instead, you own an asset –- shares of the ETF –- that are backed by gold. And where is this gold? Good question.
All the gold that backs GLD is allegedly held in HBSC (HSBC) vaults in an undisclosed location in London. How much gold is there? Nobody actually knows, and investors have to take the word of the trustee, Mellon Bank of New York (BK) that halfway across the world, enough bullion sits in these vaults to cover GLD's liability.
However, no matter how much gold it holds, there are no redemption rights by shareholders, meaning you cannot exchange your ETF shares for physical gold. In addition, the physical gold is not required to be insured, which means the trustee is not liable for loss, damage, theft, or fraud. Not too reassuring is it?
Won't Protect Against the Worst Case Scenario
Despite all the points I have outlined so far, the fail-safe that most gold enthusiasts assert is that in cases of hyperinflation or global crisis, gold will retain –- and even increase –- its value, which far outweighs its other investment risks.
But the problem with that thesis is that the U.S. government has the right, any time it wants, to confiscate gold owned by private individuals. And there is historical precedence.
In 1933, when Franklin Roosevelt came into office, he issued the Emergency Banking Act, which required all those who held gold to turn it into the government via approved banks. The citizenry was given 30 days to comply with this order and were paid the current spot rate of $20.67 an ounce.
Roosevelt allowed some exceptions, such as personal jewelry and collectables, but that was done at his discretion, and there is no guarantee that there would be any exemptions in a future confiscation. And what would be the point of having gold to protect against a catastrophic event if the government can just seize it?
Enter the Modern World
Ultimately, gold is a legacy investment vehicle from a time before mass communications, ease of global travel, and the internet. It no longer is the default store of value that it once was, and financial and technological advances have made it an investment best suited for collectors and hobbyists, but certainly not for serious investors.
Once you get your gold, you then have to decide how to store it. Keeping it at home exposes it to the risk of theft, fire or natural disaster. Taking it to the bank requires the rental of a safe deposit box, the cost of which will eat into your profit as well.
Firms will store your physical gold on site, but they charge for the service, and the idea of having your yellow treasure held by someone somewhere else, commingled with that of others, is not very appealing.
Don't Look to the Stock Market for Help
So what about the various gold ETFs –- most notably the SPDR Gold Trust (GLD)? Aren't they a cheap and easy way to own gold? The short answer is "no."
The idea behind these ETFs is to give investors a way to buy and sell gold as simply as they would a stock. But the problem is that when you buy GLD or any other gold ETF, you are not buying physical gold. Instead, you own an asset –- shares of the ETF –- that are backed by gold. And where is this gold? Good question.
All the gold that backs GLD is allegedly held in HBSC (HSBC) vaults in an undisclosed location in London. How much gold is there? Nobody actually knows, and investors have to take the word of the trustee, Mellon Bank of New York (BK) that halfway across the world, enough bullion sits in these vaults to cover GLD's liability.
However, no matter how much gold it holds, there are no redemption rights by shareholders, meaning you cannot exchange your ETF shares for physical gold. In addition, the physical gold is not required to be insured, which means the trustee is not liable for loss, damage, theft, or fraud. Not too reassuring is it?
Won't Protect Against the Worst Case Scenario
Despite all the points I have outlined so far, the fail-safe that most gold enthusiasts assert is that in cases of hyperinflation or global crisis, gold will retain –- and even increase –- its value, which far outweighs its other investment risks.
But the problem with that thesis is that the U.S. government has the right, any time it wants, to confiscate gold owned by private individuals. And there is historical precedence.
In 1933, when Franklin Roosevelt came into office, he issued the Emergency Banking Act, which required all those who held gold to turn it into the government via approved banks. The citizenry was given 30 days to comply with this order and were paid the current spot rate of $20.67 an ounce.
Roosevelt allowed some exceptions, such as personal jewelry and collectables, but that was done at his discretion, and there is no guarantee that there would be any exemptions in a future confiscation. And what would be the point of having gold to protect against a catastrophic event if the government can just seize it?
Enter the Modern World
Ultimately, gold is a legacy investment vehicle from a time before mass communications, ease of global travel, and the internet. It no longer is the default store of value that it once was, and financial and technological advances have made it an investment best suited for collectors and hobbyists, but certainly not for serious investors.
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