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Why I’ll never buy gold

Past Gold Prices via Wikipedia

When it comes to investing, I like to keep it simple.  I invest almost exclusively in Vanguard broad index funds with low expense ratios.  It’s statistically proven, and it’s the same advice you’ll get from the other bloggers in the personal finance world.

So why does anyone buy gold as an investment?  With prices over $1600/oz, things are starting to get crazy!  How is this any different from stuffing money in your mattress?  Apparently most of the world disagrees with me, but hear me out.

A hedge against market declines

Typically, gold prices rise when the economy is faltering.  It’s seen as a safer place to put your money during recessions.  So it should be no surprise that since 2008, the price of gold has skyrocketed.  But it doesn’t make a whole lot of sense to me.

My issue with buying gold as an investment are mostly on moral grounds.  I’m not an investing expert so I’m not going to pretend to know what the price will be in a few years, but I think I know a scam when I see one.

You can’t eat gold, it doesn’t provide energy, it doesn’t shelter you, and it doesn’t provide entertainment.  All it does is sit in a vault.  It has no more actual value than a rock you might find in a field (ignoring a few industrial processes).  It is also constantly being mined, thereby diminishing it’s perceived value.

Gold’s value is derived primarily from societies lust of shiny things, and their agreement that it holds value.  Sounds like a giant bubble to me…

The Purpose

Let’s consider the purpose of a few traditional investments compared to gold.  The most common investments are stocks, bonds, and real estate.  They all have one thing in common, you are giving your money to someone to help finance an operation that should prove profitable.

Essentially, you are giving your money to someone/something who can be more productive with it than you are.  Here’s why I think these concepts are fundamentally sound.

  • Stocks – Investing in companies is really buying equity in an organization that is built to make money.  They reward you for helping them expand.
  • Bonds – Bonds are debt taken on by companies/governments to provide operating capital to invest in their business.  They’re similar to stocks, only the returns are clearly laid out at the beginning of the contract.
  • Real Estate – Investing in real estate gives people a place to live while you earn money from their rent.  It’s helping people get on their feet, earn money, and contribute to society.
  • Gold – Gold doesn’t actually do anything.  It doesn’t help anyone contribute, and there’s no chance that it will produce more money.  You just have to hope that you sell at the right time.

Benefits

So the major benefit I see is that gold is fairly uncorrelated with the financial markets.  It tends to rise in price while stocks fall.  That’s nice, but I believe there are better ways to build wealth.

I’d rather finance businesses that I believe to be on solid foundation than buy a bunch of stone hoping that in 20 years people will want to pay me more for it.

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