Brad Tinnon

Brad Tinnon

Investing In Gold: 10 Reasons Not To

With Christmas right around the corner, I’m sure you would rather receive a bag of gold instead of a lump of coal. I won’t disagree with that. But the lure of gold is more like a death trap similar to the scene in Indiana Jones and The Last Crusade where Elsa dies chasing the golden holy grail. She pursued gold at all costs and it was a steep price that she paid. With that in mind, I will be sharing 10 reasons why you should avoid investing in gold. 

Reason #1: Gold Likely Won’t Help You During Armageddon.

Some people stockpile gold in preparation for some Armageddon-type event. The reality though is that if something like this were to happen, you would have a target on your back if you owned gold. Can you imagine what would happen as you carry around your sack of gold coins? Also, whose to say that gold would even be used as a currency? Perhaps bitcoin will be the prevailing currency of the future. Or maybe carrots. Who knows???

Reason #2: A Better Way to Reduce Risk in a Portfolio is with Investment Grade Bonds.

It has been ingrained in people that gold is an excellent hedge against a stock market crash. But is this really true? Yes there are many times when this was true, but it is not a given. 

A more important aspect to focus on is that gold is a very volatile asset which means that you could experience a significant negative return even if the stock market declines. 

A historically safer way to lower risk is to introduce short to intermediate term investment grade bonds in your portfolio. These types of bonds have shown a much better ability to provide a hedge in down markets.

Reason #3: Gold Has No Ability to Produce Goods, Services, or Profits.

While gold is useful for making certain products, in and of itself, it is not a productive asset. It has no ability to make anything on its own. It can’t hire people, fire people, generate sales, etc…

Warren Buffett summed it up best when he said, “Today, the world’s gold stock is about 170,000 metric tons. If it were all melded together, it would form a cube of about 68 feet per side (fitting within a baseball infield). At $1,750 per ounce, it would be worth $9.6 trillion. With the same amount of money, you could buy all US cropland (400 million acres with output of $200 billion annually) plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually), and still have about $1 trillion in cash.”

Reason #4: The Long Term Returns of Gold Can Be Down for Very Long Extended Periods of Time.

For example, are you aware that from 1980 – 1999 (20 years) gold returned a negative 6.5% per year? By contrast, the U.S. Stock Market (S&P 500) returned a positive 13.3% per year during that same time frame. To take it a step further, going back to the Great Depression, the worst 20 year period that the S&P 500 has ever experienced was a positive 1.89% per year.

Reason #5: Some of the Stocks That Your Portfolio Owns Will Likely Be Precious Metal Mining Companies Which Will Result in Duplication.

If you own a globally diversified portfolio of stocks, then you likely will own precious metals mining companies. No need to duplicate your exposure by investing in gold. 

Reason #6: Gold Tends to Dilute the Returns of Stocks.

The stock market has historically increased more frequently than it has decreased. Additionally, stocks have higher historical returns than gold. Because of these two things alone, any exposure to gold will dilute your higher stock returns over time. 

Reason #7: Gold is a Very Volatile Asset Yet it Has Significantly Lagged Behind the Returns of Stocks.

Gold had tremendous returns in the 1970s and 2000s, but despite that, gold still underperformed the U.S. Stock Market (S&P 500) by a wide margin. From 1972 to 2016, gold returned 7.43% per year while U.S. Stocks returned 10.08% per year. A $10,000 investment in gold would have grown to $252,000, but a whopping $754,000 if invested in U.S. Stocks. In addition to that, gold was actually 37% more risky than stocks. In layman’s terms, you are not being compensated for the risk your are taking in gold. 

Reason #8: It’s Usually Best to Create an Income Stream from non-IRA Assets First.

If a person has stored away physical gold that they’ve purchased, then it could be very difficult to liquidate this during retirement. As a result, you will find yourself tapping into your IRA accounts much sooner than you would have to. And this is not a good thing because the longer you can defer your IRA accounts, the greater your chance of improving your wealth

Reason #9: Gold Does Not Qualify for the 0% Long Term Capital Gains Tax Rate.

If a person is in the 15% or less tax bracket after they sell investments with long term gains, then the IRS says that you will pay 0% on those gains. This is a tremendous provision of the tax code; however, you are not eligible to take advantage of it if you own physical gold.

Reason #10: Gold Is Taxed at a Much Higher Rate Than Stocks.

Per the IRS, gold is considered a collectible and as such is taxed at a rate of 28%, which is far greater than the 15% or 20% rate that applies to stocks. So not only does gold lag behind the returns of stocks, but it is also taxed at a much higher rate. Not a good combination.

CONCLUSION

In conclusion, investing in gold certainly comes with a strong allure. However, it is important to remind yourself of the facts and fight the temptation to own it. Instead, stick to assets and investments that are far more productive in nature and have shown an ability to return more with less risk.

I would love to hear your thoughts on gold. Do you think it is a beneficial asset class? Do you feel that gold will one day be used again as a currency? Feel free to share any questions, comments, or experiences you have below. 

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Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™
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