Gold is a symbol of wealth and status that has lasted for centuries. It is so valued in our society that we even use it to emphasize greatness. “The golden rule,” “a golden opportunity,” and “worth its weight in gold” are just some of the popular gold metaphors used today. We give gold stars to children, marry with gold rings, and award champions with gold medals. Is there any question that we have been conditioned to value this shiny element?
Interestingly, gold isn’t the most valuable metal – it’s third place. But if I tell you that you have a heart of rhodium, I don’t think you’ll get the compliment. Regardless, consumers love gold. But should investors?
Gold is unique in that it is both a commodity and a currency. Most of its demand is consumed in the jewelry sector. But, as a financial asset, it’s one of the largest in the world, with a 2023 average daily trading volume of $162 billion.
This may sound enticing if you’re an investor but understand that gold is a speculative investment. Gold does not pay dividends or interest and has no income attached to it. There are periods when gold performs quite well, but there are times when it does not. Overall, the asset is volatile and greatly underperforms.
Before we make an investment of any kind, we first need to understand our objective. We don’t invest in stocks for guaranteed income, we don’t invest in bonds for maximum growth, and we don’t invest in real estate for liquidity. If you are thinking about gold, you should first understand what you want it to accomplish.
Some buy gold as a hedge against economic downturns and inflation. The long-term data shows that gold holds its value but does not provide much growth above inflation. If inflation protection is your goal, stocks have proven to be a much better investment. If market protection is what you’re after, bonds are superior. For this reason, investors like Warren Buffett and Dave Ramsey preach gold avoidance and do not hold them in their portfolios.
Others buy gold in preparation for Armageddon. If having some gold in your basement helps you sleep better at night, I’m all for it – assuming an amount within reason. You should not own more than 5% of your total financial portfolio value in gold bullion.
For doomsday purposes, gold also has its problems. You must buy physical gold. Gold dealers sell at a premium and buy back at a discount. You must store it, which takes up space and presents risks of its own. And you can’t eat it. I suggest food, gas, and medical supplies will be far more valued in the days of reckoning and will trade in far greater quantities. Silver, by the way, is even worse.
There is a significant marketing campaign for precious metals, but we urge caution. They are not the golden investment that many claim them to be.
