Gold Investment TV Pitches: Just Say No

Investing in gold is not wise for a non-professional’s portfolio. TV commercials targeting unsuspecting investors, particularly senior citizens, promote an asset class where only professional investors should trod. And most professionals aren’t into gold investment due to gold/silver’s lack of liquidity and riskiness.

False Claims

Throughout history gold has been held in high esteem and promoted as a hedge against inflation and world collapse. The gold peddlers warn about the troubling nature of fiat paper money, not backed by anything real. They claim paper money isn’t be worth anything if it can printed in unlimited quantities.

While they may have a point on the downsides of paper money, it does not lead to gold investment as the answer. Other asset classes such as stocks, bonds cash and real estate have more favorable risk/return profiles. Let’s take a further look at gold.

Poor Returns

In his book Invest with the Fed, Robert R. Johnson, wrote gold trails equities in all Conditions, despite its celebrated popular status as a hedge against inflation. He says, “From 1972 through 2013, common stocks returned 14.68 percent in falling rate environments while gold futures returned 7.85 percent. In rising rate environments, stocks returned 8.47 percent while gold only returned 4.86 percent. When rates were flat, stocks provided a gain of 10.61 percent and gold returned 8.61 percent.”

Gold not only doesn’t yield cash flows like stocks. It has a negative return because it costs money to store and insure it. It is very difficult to value. Its price is set by supply and demand instead of discounting cash flows. This feature makes it difficult to predict and subject to irrational factors such as fear and greed.

No Current Income

Retirees, dependent on an income to cover expenses, should avoid investments which don’t yield current income. Also, the compounding factor of normal investments, earning interest on the interest, is missing.

There aren’t many uses for gold investment. It’s either made into jewelry or coins or locked up in a safe. Precious metals has to be constantly hidden from thieves. From a tax standpoint, it is not wise to hold it in an IRA because it will be taxed at ordinary income rates.

If you are still unconvinced, the best way to get gold exposure is to buy an ETF (exchange traded fund) or buy stock in a gold miner with cash flow.

As you can see from an investment standpoint, gold investment has

  • poor long-term returns
  • zero current yield
  • is inefficient

Besides, those past -their-prime celebs aren’t experts and only appealing to your heart. For more on stocks and bonds investing and more reasons for avoiding gold investment, visit our Simpson Capital Management website