Gold is frequently suggested as a secure investment option, known for its stability and the fact that its value tends to remain intact over the long run. This precious metal has a reputation for being resilient and resistant to depreciation, making it an attractive choice for those looking to safeguard their financial future.
As you plan for a financially secure retirement, you might have thought about the idea of incorporating gold into your investment portfolio. Most common way to do this is by exploring gold securities, which can include stocks of companies involved in gold mining, processing, or trading.
However, investing in gold comes with certain cons which you should be aware of. Here are 7 reasons not to invest in gold.
1. Gold price is volatile
In general, gold has a reputation for maintaining its value over the long term, but it exhibits a considerably higher level of volatility as a short-term asset. This means that while gold may be a reliable store of value in the broader scope of time, its price can experience significant fluctuations over shorter periods.
One of the factors contributing to gold’s short-term volatility is its inverse relationship with the U.S. dollar. When the U.S. dollar strengthens against other currencies, the cost of gold tends to decrease, making it relatively less expensive to purchase.
Conversely, when the U.S. dollar weakens, the price of gold often rises, as it becomes more expensive in comparison to other currencies. This dynamic results from the fact that gold is often seen as a hedge against currency devaluation and is influenced by the shifts in global exchange rates.
Another aspect influencing gold’s short-term price changes is the delicate balance between its physical supply and demand. The supply of gold is dependent on factors like gold-mining companies’ production schedules and the amount of recycled gold available in the market.
On the other hand, the demand for gold can be influenced by various factors, including economic conditions, geopolitical tensions, and shifts in investor sentiment.
2. No dividends
A significant number of individuals opt to invest in gold through exchange-traded funds (ETFs). However, unlike some ETFs that offer dividend payments, gold ETFs do not provide this form of passive income. As a result, for retirees seeking to enhance their monthly Social Security checks through investment cash flow, relying solely on gold investments might not be the most advantageous choice.
Gold ETFs, while valuable for capital preservation and exposure to the gold market, do not generate regular income streams. Retirees, especially those looking to supplement their retirement income, often seek investments that provide consistent dividends, interest, or rental income. In this context, gold ETFs may not align with their income generation goals.
For retirees still interested in the potential benefits of gold investments, an alternative approach could involve considering stocks of gold-mining companies that pay dividends. By doing so, investors can potentially access both the growth potential of the gold industry and the income derived from dividends.
However, it’s essential to recognize that gold-related stocks, like most equities, are subject to higher volatility compared to stable bond investments. Therefore, retirees must carefully assess their risk tolerance and overall investment strategy before incorporating gold-related equities into their portfolio.
3. Gold has a high premium to purchase
Exchange-traded funds (ETFs) based on gold holdings possess both an intrinsic value and a market price. The intrinsic value represents the actual worth of the physical gold held by the ETF, while the market price is influenced by how traders perceive the value of gold at a specific point in time.
In ideal conditions, when the market remains stable, the intrinsic value and the market price of gold ETFs should closely align. However, gold, being a volatile asset, typically deviates from such equilibrium.
As a result of its inherent volatility, gold usually trades at a premium, indicating that investors would end up spending more money to invest in a gold ETF than the actual worth of the underlying physical gold.
This premium reflects the market’s sentiment towards gold, which can be influenced by various factors, such as economic trends, geopolitical events, and investor psychology. During periods of economic uncertainty or heightened demand for safe-haven assets, the premium on gold ETFs tends to rise, leading to a higher market price compared to the intrinsic value.
4. Gold is not a very useful commodity
Commodities such as wheat, corn, and cotton possess tangible and practical applications, making them valuable in various industries and essential for human consumption. In contrast, the value of gold primarily stems from its appeal to humans rather than its necessity for specific purposes, except for minimal usage in certain electronics.
Unlike in the past when gold played a role in backing global currencies, it no longer serves that function, and its significance is primarily as a store of value and a precious metal.
Unlike other precious metals, such as silver, which find extensive usage in jewelry as well as various industrial applications, gold’s industrial uses are relatively limited.
The value of gold heavily depends on its desirability as a symbol of wealth and luxury. Its historic significance and aesthetic appeal make it a sought-after metal for crafting jewelry and decorative items.
However, if societal preferences were to change drastically, and gold were to lose its allure as a fashionable accessory or status symbol, its value could substantially decline.
5. Gold is difficult to store
Rather than opting for gold ETFs or gold-mining company stocks, certain individuals choose to buy physical gold and store it at home, driven by the belief that gold will retain its value even if the U.S. dollar depreciates.
However, this approach faces several practical challenges, making it less feasible as a long-term investment strategy. The most crucial concern revolves around the inconvenience and potential risks associated with storing gold at home.
First and foremost, finding a secure location within one’s home to store gold discreetly is essential. The need for secrecy is paramount as advertising the possession of valuable items like gold can attract unwanted attention, potentially making one a target for theft or burglary.
Moreover, the safety of gold stored at home is susceptible to various threats. In the event of a natural disaster, such as a fire or flood, the precious metal could be irretrievably lost or damaged, leading to a substantial financial setback.
Furthermore, traveling while leaving gold at home creates anxiety and concern for the safety of one’s valuable investment. The constant worry about the security of the gold can detract from the peace of mind and enjoyment of the travel experience.
6. Gold can be stolen
Despite its limited practical applications, physical gold continues to captivate human fascination due to its allure, perceived value, and unique characteristics. However, this desirability comes with a significant downside, as accumulating a substantial amount of gold at home can make one susceptible to theft and security risks.
To safeguard the precious metal from potential thieves, individuals must go to great lengths to secure it. This involves finding a secluded and concealed area within the home that is known only to the owner and perhaps one other trusted person.
Such precautions are necessary to prevent any knowledge of the gold’s presence from leaking and potentially attracting unwanted attention from intruders.
7. Gold doesn’t have good return on investment
Taking into account the numerous factors mentioned earlier, it becomes evident that gold may not be the optimal choice for maximizing profits. Even if one manages to profit from investing in a gold ETF or mining company stock, the potential returns are highly likely to be inferior compared to alternative investment options.
To ensure that your retirement funds or savings last as long as possible and grow substantially, it is wise to explore alternative investment avenues that have historically demonstrated superior returns compared to gold.
Alternative investment options that generate better return on investment are stocks, bonds and real estate.
