Why You Cannot Invest In Gold

It is soapbox time. People ask me, "Should I be 'investing' in gold?" Advertisements show gold to be the best way to safeguard your portfolio, your family, and your four-legged friend. Many of these ads have one thing in common - they prey on your fear. They implant that seed of doubt and fear, and then exploit it by assuring you that gold will be there for you, when the world comes crashing down.

Let's break this down, piece by piece. 

If your worst fears come to fruition and the United States sinks to a land of financial ruin, government overthrow, complete anarchy...will gold be there to comfort you? 

Let's just assume that this is a legit end of the U.S. Our money is worthless, stocks all fall to zero, the sky turns dark, pigs are flying...you get the picture. What are you going to do with your gold? Buy food and water? No, the guys with guns and weapons will be getting that before you and/or from you. If you really want to prepare for the end, build a fortress, stock up on non-perishable goods, and load up on weapons. Do I advise this? Absolutely NOT. This would be a huge waste in my expert opinion. 

What about inflation? The U.S. is printing money and gold will be the best place to keep up with inflation. 

Not sure this holds much water either. From 1980-2001, inflation rose more than 200%. During that same time, gold fell from $850/oz to less than $300/oz, a drop of roughly 65%. If your goal is simply to keep up with inflation, there are many other ways to attack that. That is another topic for another post, but just know that gold is not an automatic way to track inflation. 

Aside from these two commonly argued (and flawed) scenarios, I have a fundamental problem with gold as an investment. 

Gold produces nothing. It cannot generate a profit on its own. It does not distribute dividends. It has no measure of worth, other than what other people say it's worth. You cannot use it for food, shelter, or clothing (in a meaningful way). You can only look at it. 

That brings up another point. If you can look at it, it can be stolen. If you keep it elsewhere, you are then paying someone else to store it. These costs further eat into the value. Investments in stock, bonds, real estate, and private businesses don't have these obstacles. 

To top all that off, how do you plan to buy/sell your gold? If you are an institution or have wealth in the Mark Cuban stratosphere, you have some advantages. If however, you are purchasing (like most do) from a gold dealer, you are trading with massive spreads. What I mean by this is that if you buy this "investment" and then attempt to sell it one day later (assume the market price does not change over that 24 hrs), your "investment" unfortunately lost up to 20-25% of its value. Gold dealers have to make money, and they do that by a spread. Sure, some spreads are lower than others, but b/c there is not an efficient market for trading (similar to the stock market), these spreads will eat away at the value when you sell. If it is truly an investment, you do plan to sell at some point, right?? 

Warren Buffett sums up some of my thoughts with this quote:

“Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid, you make money; if they become less afraid, you lose money, but the gold itself doesn't produce anything.”

And he tops that off with another one. This one is a real gem: 

“I will say this about gold. If you took all the gold in the world, it would roughly make a cube 67 feet on a side…Now for that same cube of gold, it would be worth at today’s market prices about $7 trillion dollars – that’s probably about a third of the value of all the stocks in the United States…For $7 trillion dollars…you could have all the farmland in the United States, you could have about seven Exxon Mobils, and you could have a trillion dollars of walking-around money…And if you offered me the choice of looking at some 67 foot cube of gold and looking at it all day, and you know me touching it and fondling it occasionally…Call me crazy, but I’ll take the farmland and the Exxon Mobils.”

Well said, Mr. B, well said. 

I see gold as not something you can invest in, but a bet you can make. You can bet that it will be higher or lower next month or next year...just like you can bet the Mavericks to win another NBA Championship or the over/under line on a football game. Wagering on the future is more of a bet than an investment. 

All that being said, if having a shiny gold coin or bar makes you sleep better at night, then maybe it is just the thing for you. Good luck on your bets, and invest well!