Gold has long been touted as an investment that will hold its value, yet this is often misconstrued as being true. Unfortunately, this is simply an illusion.
Although gold’s prices fluctuate dramatically, its long-term returns after inflation are far worse. Stocks outperformed gold in every standardized period going back three decades.
It’s not a good hedge against inflation
One of the top reasons investors and advisors give for purchasing gold is hedging against inflation – but does it actually work?
Yes, but only for very brief periods. A quick search through academic literature reveals that gold has an extremely low correlation to annual inflation; however, according to Rick Nott of LourdMurray senior wealth advisor services who notes 21st-century instruments backed by gold–such as ETFs or Sovereign Gold Bonds–may help mitigate some of its drawbacks.
Gold doesn’t provide much in terms of returns for investors compared with stocks (profitable companies with dividends), bonds or real estate investments; with nominal rates near zero and even negative due to inflation, real rates also tend towards zero; making its effectiveness as an inflation hedge less effective – this has caused many investors to reconsider purchasing gold as an inflation hedge today.
It’s not a good investment
Gold isn’t considered an effective investment because it does not produce any return, especially during times when interest rates have hit record lows and savings accounts are no longer the safest place to keep their wealth. Therefore, many savers are seeking alternate methods of storage as a safer way of protecting their wealth.
Gold may not be an appropriate investment due to its inability to maintain your purchasing power over the long term; indeed, its purchasing power declined between 1979 and 1983. Many people invest in gold hoping it will hold up in times of catastrophe; but this simply isn’t true.
There are other investments that will generate returns for you, diversifying your portfolio in the process. Physical gold comes with storage costs and capital gains taxes; therefore it would be wiser to include only a limited amount in your portfolio.
It’s not a good diversifier
Gold has long been promoted as an effective hedge against inflation and financial crises as well as an excellent diversifier, offering protection during these turbulent times. But this investment should only comprise part of your overall portfolio: small amounts such as 1-5% should suffice.
Property isn’t an income-producing asset like stocks or bonds, nor does it present the possibility of capital gains in a bull market; instead, there may be storage costs involved as well as security concerns in dangerous parts of the world.
Gold’s track record as an inflation hedge has been less than impressive. Over most standardized periods in history, it has fallen behind inflation while failing to outshone stocks long term. Furthermore, due to being less liquid than company shares or currencies it may be difficult for you to sell off when no longer required.
It’s not a good long-term investment
Gold does not hold up well in terms of long-term investments, according to a recent study that compared its returns with those on long-term bonds and stocks. Over a 50 year period, it returned just 1.1% after inflation while bonds yielded returns of 2.9% and 7.4%, respectively.
Gold differs from other investment assets in that it does not produce passive income through dividends or interest payments, as it’s not a productive asset such as companies which reinvest profits to increase intrinsic value or real estate which provides rental income.
Gold remains popular because it has historically fared well during financial crises. Many consider investing in it a sound strategy against inflation and to diversify their portfolios, however. If investing in anything specific it must meet both your goals and risk tolerance before going further with that investment decision.