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Is gold a good investment?

Is gold a good investment? Will it lead to capital preservation and help and investor realize a return on investment? The question is polarizing, with some investors known as "gold bugs" being obsessed by it and others being completely dismissive of gold as an investment.

No, gold is a terrible investment

An investor should not put their money into gold under any circumstance.

Gold produces no dividends or yield and does not contribute to economic growth

Buying gold is the oldest kind of investing activity and the one about which opinions are most polarized. Unlike bonds which pay a coupon, or stocks which pay a dividend, gold has no yield. It can never return any coupon or dividends to an investor. Gold produces no dividends or yield.

Gold doesn't grow, unlike investments in companies

It is much better to own a business like Coca Cola or Starbucks that can grow over time than gold, which can never grow or change. Stocks will compound money, but gold can't.

The use of gold as currency is based on tradition, not logic

The economist John Maynard Keynes famously called gold a “barbarous relic”, suggesting that its usefulness as money or a standard of currency is an artifact of the past. There do not seem to be any major benefits gained from implementing the gold standard into the current economy. It severely impedes the government's ability to help the country during times of recession.

The value of gold is highly volatile and can easily collapse

Gold is highly volatile and trades like a long-dated zero coupon bond, so it's value has very big swings up and down based on real rates. Gold is a very risky investment with a high standard of deviation.

Yes. Gold is a great investment

Gold can preserve value for an investor in the face of inflation.

Gold has been used as a reliable currency for over 4,000 years

All paper currencies have eventually ended up worthless and replaced by other newer paper currencies. Gold, on the other hand, has been used as money for 4,000 years. If you hold cash in your portfolio, you should hold gold instead.

Gold is stable, durable and malleable, and will outlast all other currencies

Gold does not dissipate into the atmosphere, it does not burst into flames, and it does not poison or irradiate the holder. It is rare enough to make it difficult to overproduce and malleable to mint into coins, bars, and bricks. Civilizations have consistently used gold as a material of value.

Gold is neither good nor bad, it depends on the circumstances

Gold does well in some environments and poorly in others. The main determinant is whether real rates are positive or negative.

Real rates are the driver of gold

Gold's performance is not tied to the level of inflation but the level of real interest rates. This goes contrary to what many thought and is called Gibson's Paradox. When real rates are positive, gold does poorly. When real rates are negative, gold does well.

Gold is a good investment when bonds have negative yields

Gold does well when real rates are negative. Given inflation is positive today and real rates are negative in nominal and absolute terms, gold will do very well. Unsurprisingly, gold prices are highly correlated to the percentage of government bonds trading with negative yields.
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This page was last edited on Wednesday, 16 Sep 2020 at 07:42 UTC