Why You Should Not Invest in Gold
(1)Gold is NOT a good long term investment.
(2)Let's take a quick look at the Gold.
Gold has been around for a long time.
It has multiple uses: a.
Ornamentation.
(Jewelry) b.
Industrial uses.
Many green technologies use small amounts of gold, and since there are many emerging green technologies, these small amounts will add up to larger amounts.
This is a typical supply and demand function and there will always be a manageable level of gold supply to meet industrial demand.
There are no shortages even at today's historic high prices of gold.
This economic fact alone should be sufficient to keep you away from gold.
Why would you invest in gold when there seems to be plenty to go around for industrial use, not to mention sufficient supply for jewelry too? You have seen spikes in commodities such as copper, oil, platinum, etc, but the price swing for "gold" has never approached the price swings brought on by the changing demand/supply like you see in other commodities.
c.
Money.
Gold has been used for many centuries as "money.
" Why? Because it is pretty, it is relatively rare, and it is dense, hence, easy to transport and exchange.
Money is a "unit of exchange" and a "store of value.
" It has served this function until the 20th Century.
Interesting, it no longer is used as Money.
d.
Security.
Gold is a great medium for security.
i.
It is easily stored, accounted for, and transportable.
ii.
It can be taken with you (unlike a checking account) iii.
Cash can be taken with you, but the country issuing the cash may not be there when you need it.
And, your bank may not be either.
iv.
So, it is nice to be able to look in your pocket, sock, or underwear and see, feel, smell and touch it.
v.
There are clearly reasons to have your assets in Gold if you are in a country with any type of instability (political or financial).
But, this analysis is written for those of you who are not in such countries.
More about this later.
e.
That leaves on other thing for which Gold can serve a Purpose: Investment.
(3)Why is Gold a Bad Investment? a.
There are Many Reasons so it is important to analyze all of them.
Fortunately, in support of my position, all of them suggest that gold is a bad investment.
b.
If you had purchased gold i.
In 1935 for $35 per once your current return on your investment would be 5.
35% annual return based on Gold's current price of approximately $1,250.
ii.
In 1980 for $875 per once your current return on your investment would be about 1.
25% iii.
Are these the types of returns that you want? I don't think so.
What makes you think Gold will appreciate at higher rates? iv.
Gold would have to be selling at $2,200 per once in 2010 to have kept pace with inflation from 1980.
c.
There is a Fine Wine Phenomenon in Gold.
The price of a fine red wine keeps appreciating, finally reaching an astronomical price.
After having paid a few thousand dollars for the pricey, famous bottle of Ajax Red, the Wine Investor decided to try the Wine for which he paid so much.
The Wine Investor then opened the Bottle with much fanfare and tasted the rich wine.
"This is Terrible announced the Purchaser.
" The Seller replied, "That wine is for Investing, not drinking.
" The same can be said of gold.
d.
Most Proponents of Gold Investments has a vested interest in Gold.
They want the price to go up, and they want you to want the price to go up.
But it will not! e.
Gold for Investment has no functionality.
Buy a house (and I am not suggesting that you buy a house) you can use the house and derive some income for the rent (you may still lose money on your investment but the Asset in your possession does produce income.
The same is true of Stocks which pay dividends, bonds and annuities that pay interest, and bank accounts that also pay interest.
Gold just sits there.
It is your money in the Gold and it just sits there.
The only way you benefit is if the price increases.
And, the price must increase by more than your cost of funds, your alternative investments, and your opportunity cost.
And, it must be the inflation rate too.
Those a big Challenges for the Gold Fellow.
f.
And, if you are an American, gold is taxed as a capital asset...
so it is tax disadvantaged (This is not a small matter, but proponents and pundits either forget or ignore this fact).
g.
In order to win at Gold, one and/or many of the following has to occur i.
Significant inflation (then you are a winner) ii.
Political unrest and your country becomes unstable (then you are a winner, but only if you have the gold in your possession and are able to get in where you want to be) iii.
The only other possibility for you is for there to be a 1.
Dramatic shift upward in the demand function.
Now this could happen.
Both g(i) and g(ii) above cause rapid and rightward shifts in the demand function.
But absent I, and ii, your only hope is that there is an a.
Increase in the demand for jewelry or some unmet industrial or commercial need for Gold.
I submit that this is NOT likely.
If you think it is, tell me "why?" 2.
Dramatic shift downward and to the left of the supply function.
A shortage of Gold.
The Gold Pundits love to talk about the shortage of "Gold" and then impending shortage of "Gold.
" Well, if you have $1250 today you can buy as many ounces as you want...
and if the price increases, more gold mines will (a) reopen and (b) more gold will be found.
(4)Let's also look at The Reality of Gold as an Investment.
1.
Does Buffet and Group own Gold? No, but maybe they are wrong this time.
2.
Do Sovereign Funds own Gold? Answer, No! With small exceptions.
And most Sovereign Funds represent Countries with a Fondness of Gold.
Go Figure.
3.
And, get this one.
China's Central Bank is managed by four PhD's and a Chinese Businessman.
Interestingly, all four PhD's are from prestigious American Universities.
China has more than $2,000,000,000,000 in American securities with various maturities with average yields of less than 2%.
The Central Bank in China has discussed on many occasions converting some of these US Dollar Investments into Gold.
They have not.
I rest my Case.
(5)Gold is a unique metal, it will always occupy financial discussions (I am not sure "why," but it will.
But there are slim possibilities that you will be making a smart investment if you put your hard earn money into "Yellow Metal.
" It only has visual, not financial "luster.
" (6)PS: There may be reasons to have "Gold" if you are (1) in a short term play, but even then, it has never been overly volatile, (2) you want to move some asset secretly (that is your decision), and/or (3) You are you funds are in a volatile or unstable environment.
(2)Let's take a quick look at the Gold.
Gold has been around for a long time.
It has multiple uses: a.
Ornamentation.
(Jewelry) b.
Industrial uses.
Many green technologies use small amounts of gold, and since there are many emerging green technologies, these small amounts will add up to larger amounts.
This is a typical supply and demand function and there will always be a manageable level of gold supply to meet industrial demand.
There are no shortages even at today's historic high prices of gold.
This economic fact alone should be sufficient to keep you away from gold.
Why would you invest in gold when there seems to be plenty to go around for industrial use, not to mention sufficient supply for jewelry too? You have seen spikes in commodities such as copper, oil, platinum, etc, but the price swing for "gold" has never approached the price swings brought on by the changing demand/supply like you see in other commodities.
c.
Money.
Gold has been used for many centuries as "money.
" Why? Because it is pretty, it is relatively rare, and it is dense, hence, easy to transport and exchange.
Money is a "unit of exchange" and a "store of value.
" It has served this function until the 20th Century.
Interesting, it no longer is used as Money.
d.
Security.
Gold is a great medium for security.
i.
It is easily stored, accounted for, and transportable.
ii.
It can be taken with you (unlike a checking account) iii.
Cash can be taken with you, but the country issuing the cash may not be there when you need it.
And, your bank may not be either.
iv.
So, it is nice to be able to look in your pocket, sock, or underwear and see, feel, smell and touch it.
v.
There are clearly reasons to have your assets in Gold if you are in a country with any type of instability (political or financial).
But, this analysis is written for those of you who are not in such countries.
More about this later.
e.
That leaves on other thing for which Gold can serve a Purpose: Investment.
(3)Why is Gold a Bad Investment? a.
There are Many Reasons so it is important to analyze all of them.
Fortunately, in support of my position, all of them suggest that gold is a bad investment.
b.
If you had purchased gold i.
In 1935 for $35 per once your current return on your investment would be 5.
35% annual return based on Gold's current price of approximately $1,250.
ii.
In 1980 for $875 per once your current return on your investment would be about 1.
25% iii.
Are these the types of returns that you want? I don't think so.
What makes you think Gold will appreciate at higher rates? iv.
Gold would have to be selling at $2,200 per once in 2010 to have kept pace with inflation from 1980.
c.
There is a Fine Wine Phenomenon in Gold.
The price of a fine red wine keeps appreciating, finally reaching an astronomical price.
After having paid a few thousand dollars for the pricey, famous bottle of Ajax Red, the Wine Investor decided to try the Wine for which he paid so much.
The Wine Investor then opened the Bottle with much fanfare and tasted the rich wine.
"This is Terrible announced the Purchaser.
" The Seller replied, "That wine is for Investing, not drinking.
" The same can be said of gold.
d.
Most Proponents of Gold Investments has a vested interest in Gold.
They want the price to go up, and they want you to want the price to go up.
But it will not! e.
Gold for Investment has no functionality.
Buy a house (and I am not suggesting that you buy a house) you can use the house and derive some income for the rent (you may still lose money on your investment but the Asset in your possession does produce income.
The same is true of Stocks which pay dividends, bonds and annuities that pay interest, and bank accounts that also pay interest.
Gold just sits there.
It is your money in the Gold and it just sits there.
The only way you benefit is if the price increases.
And, the price must increase by more than your cost of funds, your alternative investments, and your opportunity cost.
And, it must be the inflation rate too.
Those a big Challenges for the Gold Fellow.
f.
And, if you are an American, gold is taxed as a capital asset...
so it is tax disadvantaged (This is not a small matter, but proponents and pundits either forget or ignore this fact).
g.
In order to win at Gold, one and/or many of the following has to occur i.
Significant inflation (then you are a winner) ii.
Political unrest and your country becomes unstable (then you are a winner, but only if you have the gold in your possession and are able to get in where you want to be) iii.
The only other possibility for you is for there to be a 1.
Dramatic shift upward in the demand function.
Now this could happen.
Both g(i) and g(ii) above cause rapid and rightward shifts in the demand function.
But absent I, and ii, your only hope is that there is an a.
Increase in the demand for jewelry or some unmet industrial or commercial need for Gold.
I submit that this is NOT likely.
If you think it is, tell me "why?" 2.
Dramatic shift downward and to the left of the supply function.
A shortage of Gold.
The Gold Pundits love to talk about the shortage of "Gold" and then impending shortage of "Gold.
" Well, if you have $1250 today you can buy as many ounces as you want...
and if the price increases, more gold mines will (a) reopen and (b) more gold will be found.
(4)Let's also look at The Reality of Gold as an Investment.
1.
Does Buffet and Group own Gold? No, but maybe they are wrong this time.
2.
Do Sovereign Funds own Gold? Answer, No! With small exceptions.
And most Sovereign Funds represent Countries with a Fondness of Gold.
Go Figure.
3.
And, get this one.
China's Central Bank is managed by four PhD's and a Chinese Businessman.
Interestingly, all four PhD's are from prestigious American Universities.
China has more than $2,000,000,000,000 in American securities with various maturities with average yields of less than 2%.
The Central Bank in China has discussed on many occasions converting some of these US Dollar Investments into Gold.
They have not.
I rest my Case.
(5)Gold is a unique metal, it will always occupy financial discussions (I am not sure "why," but it will.
But there are slim possibilities that you will be making a smart investment if you put your hard earn money into "Yellow Metal.
" It only has visual, not financial "luster.
" (6)PS: There may be reasons to have "Gold" if you are (1) in a short term play, but even then, it has never been overly volatile, (2) you want to move some asset secretly (that is your decision), and/or (3) You are you funds are in a volatile or unstable environment.
Source...