Gold is the worst investment in history

Brian Lund-originally published Feb 5, 2015    Lesson: Think for yourself. 



Nobody wants to be the bearer of bad news. Nobody wants to crush people’s dreams. But in the world of investing, cold, hard facts, not dreams, are what make you money. And the fact of the matter is, historically speaking, buying gold is the worst possible investment you can make.

I am very sensitive to the fact that what I just said has probably caused some readers to go apoplectic, and for that I apologize. I know that I will never convince the gold bugs, inflation hawks or doomsday preppers of this thesis, nor my own personal position that gold will eventually be worthless. But for the rest of you, let me lay out the case to avoid gold as an investment.

The Numbers Don’t Lie

In his seminal book “Stocks for the Long Run,” renowned economics professor Jeremy Siegel looked at the long-term performance of various asset classes in terms of purchasing power — their monetary wealth adjusted for the effect of inflation.

With a $1 investment each in stocks, bonds, T-bills and gold, beginning in 1802 and ending in 2006, Siegel calculated what those assets would then be worth.

Stocks were the big winners, growing the initial dollar investment into $755,163. Bonds and T-bills trailed dramatically, returning only $1,083 and $301 respectively. But the big surprise was in how badly gold fared during that time, only growing to $1.95.

An Inefficient Investment Vehicle

In addition to its miserable historical performance, gold also has many other failings as an investment, not least of which are the cumbersome and inefficient options available to own it and the prevalence of less than reputable salespeople in the precious metals space.

Owning physical gold in the form of bullion has many drawbacks. Wide bid and ask prices on physical gold ensure that the moment you purchase it you are already underwater on your investment. In addition, shipping costs for the heavy metal will further add to your cost basis.

Once you get your gold, you then have to decide how to store it. Keeping it at home exposes it to the risk of theft, fire or natural disaster. Taking it to the bank requires the rental of a safe deposit box, the cost of which will eat into your profit as well.

Firms will store your physical gold on site, but they charge for the service, and the idea of having your yellow treasure held by someone somewhere else, commingled with that of others, is not very appealing.

Enter the Modern World

Ultimately, gold is a legacy investment vehicle from a time before mass communications, ease of global travel, and the internet. It no longer is the default store of value that it once was, and financial and technological advances have made it an investment best suited for collectors and hobbyists, but certainly not for serious investors.

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Even money says this post attracts the GOLD IS DOOMED advertisement on the page

Editor: Too bad gold isn’t an investment but just money.

Misconceptions about gold S&D

7 responses to “Gold is the worst investment in history

  1. The “gold is an investment” meme is a brilliant sleight of hand by the fiat money peddlers and their sycophants. Among acquaintances, I’ve successfully reoriented discussions simply by inverting: how many dollars can one ounce of gold purchase today vs [date in past]?

    Taking it further, I find it helpful to explain that gold is a relatively straightforward way to *preserve* wealth while I look for attractively-priced assets that *build* wealth; during some environments (like today), the opportunity set for my experience/skill/risk tolerance is extremely limited or nonexistent. And those doldrums can last for years, so better gold than dollars, especially if there’s a nonzero chance of runaway inflation due to coordinated central bank action.

    On a related note, I find Buffett’s famous comments about gold unhelpful for most people, given his unique circumstances. (This actually applies to a lot of his advice, wise and brilliant as it is.) Berkshire has a collection of businesses that can “float” with inflation (e.g. pass-through costs), so converting funny-money to real money isn’t quite as essential to wealth preservation.

    Sorry to blather on; while I don’t consider myself a gold expert by any means, I’m baffled that people make this whole subject more complicated than necessary. Thanks for sharing this representative example.

    • EXCELLENT post and points. I find W. Buffett’s criticism of gold disingenuous and also his lack of protest against what the Fed is doing to distort prices and investment.

      Type in the search box: Inflation swindles the equity investor

      Buffett knows better.

      Then type in: Howard Buffett

      See his article on gold.
      Maybe Buffett was protesting against his father’s beliefs.

  2. Mine is not a comment pro or con for the commodity, but to the analytical difficulties with gold. In particular, there are something like 500 years worth of gold production in inventory (jewelry, coins, bars, etc). Any other commodity with 500 years of inventory would be close to worthless. So supply/demand/inventory is meaningless. Gold/oil is interesting, but oil is beholden to normal supply/demand/inventory and gold is not. Other fundamental comparisons are logically tenuous as well. So then one is left with momentum/trend.

    Nick de Peyster

    • Exactly. Gold has a massive stock-to-flow ratio–2,000 tonnes produced each year vs. 180,000 tonnes estimated or 90 to 1 roughly.

      Therefore, gold is mostly valued as money. RESERVATION DEMAND sets the price. If you bid $300 an ounce for silver, you can have my silver tea set.

  3. Just need to be mindful of survivorship bias inherent in a lot of these asset comparison studies. It is only a fair comparison if things are always there, through ups and downs. Also how many fiat currencies have even lasted remotely closely to gold.

    • Agreed for stocks in an index. All fiat currencies have gone to their inherent value–$0.00. In the US, it has happened twice with the Continental dollar and the Confederate dollar.

      So ask yourself, could the dollar collapse while its quantity shrinks? Look what supports the dollar: Mostly long term mortgages and Treasuries with several thousand tonnes of gold. What happens when interest rates rise? Look at the Fed’s balance sheet.

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