Gold has long been seen as an attractive investment option for those worried about inflation; however, investing in companies which are poised to experience growth over time may prove more fruitful.
Gold may captivate investors during periods when prices surge; however, its long-term returns (after inflation) are dismal. Here are three reasons why.
1. It’s not a currency
Gold is often seen as an asset worth keeping during times of economic stress, such as the Russian debt crisis or Asian financial crises. Gold tends to remain its value over time. Therefore, many people invest in it during such times as these.
Unfortunately, gold hasn’t proved itself as an effective store of value over the long run. Looking at its chart, you’ll see that over the years it has experienced some dramatic declines — 60% drops in early 1980 and 50% declines by early 20-teens are far from optimal performance for an investment that’s meant to safeguard long-term wealth preservation.
Gold investment can be expensive to store. Storage and security fees add up quickly when investing in physical gold such as coins or bars, which means this problem only worsens over time.
2. It’s not a store of value
Gold has historical value as money. While its use as jewelry pieces remains relevant in modern economies, modern economies don’t consume nearly as much gold compared to commodities like coffee or oil, making it less useful as raw material.
Prices do fluctuate with the market, yet their movements can be difficult to anticipate and they don’t recover quickly after periods of decline.
Stocks may add diversification to a portfolio, but they should not be treated as long-term investments. Stocks are highly volatile and their prices can plummet during bear markets. Furthermore, stocks do not serve as an effective hedge against inflation or as a safe haven in an emergency situation. As an alternative investment solution consider a portfolio of growth stocks; their power of compounding over time could make a substantial difference over time.
3. It’s not a hedge against inflation
Gold has not proven itself a reliable store of value during periods of rapid inflation. For instance, during the COVID-19 pandemic its price rose dramatically but not at the same rate as prices for goods and services; its rate was even lower than other periods of high inflation, such as when its value peaked at $850 an ounce back in 1980.
Gold’s value doesn’t decline faster than other investments like stocks or bonds, meaning it doesn’t provide an effective hedge against inflation.
If you want to protect yourself from runaway inflation, investing in treasury bills or stocks is usually more efficient. Gold may add some sparkle to your portfolio but is not suitable as an inflation hedge as its prices don’t rise with consumer prices – an essential characteristic of an effective inflation hedge – plus, its risk is usually too great for most investors to bear.
4. It’s not a long-term investment
Gold does not generate real wealth and holding onto it will only add expenses over time. By contrast, investing in stocks will grow over time as you purchase additional shares and receive dividend payouts.
Gold’s price fluctuates wildly and often responds to investors’ anxieties regarding other assets like stocks or real estate. When these fears are strong, investors rush to put money in these assets – and when fear dissipates and these investments drop in value, many turn their focus towards gold instead.
Gold has historically offered disappointing long-term returns compared to stocks, and its reputation as an inflation hedge is often inaccurate. Up until recently, economies needed to mine and mint more gold each year in order to maintain currency values; this took an incredible drain on productivity capacities; now central bank intervention keeps pace with inflation instead.