Gold: The Dumbest Investment of All Times

QUICK! Name me an investment that doesn’t pay dividends (ever), doesn’t really ever go up, costs money every month to store and is as volatile as the most risky stocks. Nothing coming to your mind? Well, it’s gold of course:

Gold price vs inflation

Source: http://www.aboutinflation.com/gold-vs-inflation

When I first started studying finance, many many years ago, I was told I should always devote “at least” 10% of my portfolio to gold. I had one teacher that repeated over and over again that “whenever the economy goes badly, gold is a safe bet.”

Except it’s not.gold sucks

Gold did go up during the financial crisis, butt his graph clearly shows it’s trailing the market by wide margins. Worse yet, the S&P500 pays dividends (currently 2.61%) and barely costs 0.11% to hold every year (administrative ), giving you a non-negligeable 2.5% return per year. And this dividend yield will grow by 4-5% per year by the way.

What does gold offer? Nothing. Gold is never going to send you a check in the mall, believe me. On the contrary, you’ll have to pay every month for the priviledge of holding it. You’ll have to pay for storage space, insurance, protection, handling, etc. Even with the lowest fees I could find, you are still paying 0.65% (0.4%+0.25%) per year in storage and insurance fees. That’s money that is purely lost – gone forever.

Earning 2.5% per year (growing at 5% per year) or losing 0.65% per year? Hmmm, tough choice.

In my entire life, I’ve never bought gold, silver or any of that garbage. I fail to see a point. One of my most recent purchases, APR.UN, sends me a $134 check every month. What will gold send me again? Oh yeah.

People who like gold like to pretend it will protect them in case of an economic collapse. But let me tell you this: if there is an economic collapse, do you really think anyone is going to care about your shiny metal? Of course not: people will care about food, weapons, clothes, clean water and so on. If the economy crashes, your gold is useless anyway, so what’s the point?

Gold is a terrible investment no matter how you see it. The day I turned 18, I decided I wanted to buy some gold. You know, some kind of present to myself. I went to a bank that was supposedly specialized in it and asked for an ounce of gold, which is all I could afford.

The total cost? $460 USD (around $610 CAD) + $40 processing fee + 5% transaction fee. Total cost? $672.50

If I had kept my coin of gold for all those years, it would be worth around $1750 today, roughly a 2.5x return after fees (because yeah, you gotta pay the fee whenever you buy or sell). This sounds great until you realize the S&P500  went up 400% during that period (plus dividends). Oh, and for the gold, you have to assume it is not stolen/lost/damage, of course.

Gold sucks.

It won’t protect you in case of an economic crash. It will perform slightly better than some other assets, but at what costs? You’ll get a mediocre return whenever the economy goes well (that is, most of the time). “But if there is a crash people will flock to it!” Maybe, but if the economy grows, people will flock to stocks. This makes no sense.

But what about gold mining/producing companies?

They sound like a crappy investment too. Again, look at gold prices:

gold companies

What I want you to see is the volatility. Look at how much gold varies. A clever reader might say that the same is true for any other metal, but I don’t exactly promote iron or nickel neither.

So anyway, say you invest in a mining company: within a year, the spot prices can fluctuate from 1700 to 1200. That’s a 30% drop. If the company had a 30% profit margin, that margin is gone and the company is now burning money.

Investing in a company that can become valueless pretty much overnight? What a great deal!

An astute reader might mention the same problem can also apply to oil. Oil does tend to fluctuate quite a bit, as illustrated by the latest events. But oil has a clear difference: when it’s used, it’s gone. Eventually, one day, we’ll run out oil. It will be gone – completely. We won’t run out of gold anytime soon and even if we do, it’s not going to change much. 54% of all gold mined is used for jewelry and 34% is just stored in a vault never to be used again, so who cares really? “Oh noes, I’ll have to wear silver instead of gold! Panic!”

Oil, on the other hand, has more uses than I can count. We’re not going to stop being reliant on oil for at least 50 years and I wouldn’t be surprised if oil is still pumped in 1,000 years, if only for the chemical industry. Seriously, oil is used in so many places that I don’t think we’ll ever “not” need it.

Aside from being stored in vaults, gold is useless and I would never buy any. As for a gold mining company, it’s simply too risky. You’ll never make tons of money owning a gold company and you might lose a lot. So why would you do that?

The only mining company I ever considered buying was Silver Wheaton (TSE:SLW), a company that receives royalty from silver mines. Their business model make sense and they have very little exposure to the silver spot prices. But simply said, there are better opportunities. For the same risk, I can get far more than a 0.87% dividend and a 20% average return in the last 10 years (with extreme volatility). For instance, SLW still crashed 50% in 2015, which shows that, well, this is still a mine-related company.

Forget about gold and forget about silver. It’s not you for (or me).

 

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