We know the risks of ETFs, but can you help this newbie understand the spin of his other points?

Jodi Stanley
By Jodi Stanley on Thu, Feb 5, 2015 - 9:44am

 

Gold Is the Worst Investment in History

Gold barsMarko
 
Beric
Nobody wants to be the bearer of bad news. Nobody wants to crush people's dreams. But in the world of investing, cold, hard facts, not dreams, are what make you money. And the fact of the matter is, historically speaking, buying gold is the worst possible investment you can make.

I am very sensitive to the fact that what I just said has probably caused some readers to go apoplectic, and for that I apologize. I know that I will never convince the gold bugs, inflation hawks or doomsday preppers of this thesis, nor my own personal position that gold will eventually be worthless. But for the rest of you, let me lay out the case to avoid gold as an investment.

The Numbers Don't Lie

In his seminal book "Stocks for the Long Run," renowned economics professor Jeremy Siegel looked at the long-term performance of various asset classes in terms of purchasing power -- their monetary wealth adjusted for the effect of inflation.

With a $1 investment each in stocks, bonds, T-bills and gold, beginning in 1802 and ending in 2006, Siegel calculated what those assets would then be worth.

Stocks were the big winners, growing the initial dollar investment into $755,163. Bonds and T-bills trailed dramatically, returning only $1,083 and $301 respectively. But the big surprise was in how badly gold fared during that time, only growing to $1.95.

An Inefficient Investment Vehicle 

In addition to its miserable historical performance, gold also has many other failings as an investment, not least of which are the cumbersome and inefficient options available to own it and the prevalence of less than reputable salespeoplein the precious metals space.

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Owning physical gold in the form of bullion has many drawbacks. Wide bid and ask prices on physical gold ensure that the moment you purchase it you are already underwater on your investment. In addition, shipping costs for the heavy metal will further add to your cost basis.

Once you get your gold, you then have to decide how to store it. Keeping it at home exposes it to the risk of theft, fire or natural disaster. Taking it to the bank requires the rental of a safe deposit box, the cost of which will eat into your profit as well.

Firms will store your physical gold on site, but they charge for the service, and the idea of having your yellow treasure held by someone somewhere else, commingled with that of others, is not very appealing.

Don't Look to the Stock Market for Help

So what about the various gold ETFs –- most notably the SPDR Gold Trust (GLD)? Aren't they a cheap and easy way to own gold? The short answer is "no."

The idea behind these ETFs is to give investors a way to buy and sell gold as simply as they would a stock. But the problem is that when you buy GLD or any other gold ETF, you are not buying physical gold. Instead, you own an asset –- shares of the ETF –- that are backed by gold. And where is this gold? Good question.

All the gold that backs GLD is allegedly held in HBSC (HSBC) vaults in an undisclosed location in London. How much gold is there? Nobody actually knows, and investors have to take the word of the trustee, Mellon Bank of New York (BK) that halfway across the world, enough bullion sits in these vaults to cover GLD's liability.

However, no matter how much gold it holds, there are no redemption rights by shareholders, meaning you cannot exchange your ETF shares for physical gold. In addition, the physical gold is not required to be insured, which means the trustee is not liable for loss, damage, theft, or fraud. Not too reassuring is it?

Won't Protect Against the Worst Case Scenario

Despite all the points I have outlined so far, the fail-safe that most gold enthusiasts assert is that in cases of hyperinflation or global crisis, gold will retain –- and even increase –- its value, which far outweighs its other investment risks.

But the problem with that thesis is that the U.S. government has the right, any time it wants, to confiscate gold owned by private individuals. And there is historical precedence.

In 1933, when Franklin Roosevelt came into office, he issued the Emergency Banking Act, which required all those who held gold to turn it into the government via approved banks. The citizenry was given 30 days to comply with this order and were paid the current spot rate of $20.67 per ounce.

Roosevelt allowed some exceptions, such as personal jewelry and collectables, but that was done at his discretion, and there is no guarantee that there would be any exemptions in a future confiscation. And what would be the point of having gold to protect against a catastrophic event if the government can just seize it?

Enter the Modern World

Ultimately, gold is a legacy investment vehicle from a time before mass communications, ease of global travel, and the internet. It no longer is the default store of value that it once was, and financial and technological advances have made it an investment best suited for collectors and hobbyists, but certainly not for serious investors.

Like what you read? Want more? Then sign up for my free, once weekly newsletter The Lund Loop to get exclusive insights into what I am writing, reading, and hearing about the stock market. Click here to sign up.

 
 

10 Comments

Luke Moffat's picture
Luke Moffat
Status: Gold Member (Offline)
Joined: Jan 25 2014
Posts: 364
Investment?

Whoever said that gold was an investment? Gold is insurance against the stupidity of those privileged few who have licence to counterfeit the medium of exchange.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
Luke is right, Gold is money

The best money.  One of the hits on Gold has historically been that it does not yield... well, storing your debt based fiat in a bank does not create (net) positive yield anymore either.. and it never again will, because the sovereigns have too much debt to allow interest rates to ever normalize.  Gold's time has come.  Most people have no Gold or Silver... I would never counsel anyone to put all their eggs in one basket.. I only counsel that folks should get their positions set in physical Gold and Silver while they still can.. 10% of your wealth should be viewed as a minimum; 

 

themccarthyfarm's picture
themccarthyfarm
Status: Bronze Member (Offline)
Joined: Dec 4 2014
Posts: 25
Gold question?

When Chris, along with a lot of others, talk about gold there are two points that seem to conflict.  First, HISTORICALLY gold has been what smart people buy to protect their wealth.  Second, we are in UNCHARTED WATERS, the world has never been in a place like this before.  How do we know history is going to play out the same as it has if we have never seen this kind of situation before?  It seems there is a risk that if the economy falls apart there might not be anyone willing or able to buy my gold from me.  A side of beef might be worth more then my gold.  What do you think?

Wendy S. Delmater's picture
Wendy S. Delmater
Status: Diamond Member (Offline)
Joined: Dec 13 2009
Posts: 1982
not me

I happen to agree with themccarthy farm, that a side of beef may someday be worth more than an ounce of gold, I'm looking at the amount of arable land, population trends, and our fragile monocropping farming practices, and I can see this much. Should the oil used to make bug and weed killers and artificial fertilizers become prohibitively expensive, that's gonna cause a huge famine like the world has never seen. And after this lull in oil prices that will kill oil exploration and many existing wells, that is exactly where we are headed.

Support local farmers and farming that does not require petrochemical inputs. The life you save may be your own. Get some land and learn to work it, if you can.

Gold makes pretty jewelry, but it is also really, really hard to break a gold bar to buy a loaf of bread, so I have a small amount of silver as my insurance. And a garden. And local farmers that do things the old-fashioned way.

Jim H's picture
Jim H
Status: Diamond Member (Offline)
Joined: Jun 8 2009
Posts: 2379
This guy answered Jodi directly...

Jodi Stanley's picture
Jodi Stanley
Status: Member (Offline)
Joined: Feb 5 2014
Posts: 21
Ha! He DID answer me directly, thanks, Jim!

And to all who have helped deepen my knowledge base!

Jodi Stanley's picture
Jodi Stanley
Status: Member (Offline)
Joined: Feb 5 2014
Posts: 21
Ha! He DID answer me directly, thanks, Jim!

And to all who have helped expand my knowledge base!

thebrewer's picture
thebrewer
Status: Silver Member (Offline)
Joined: Nov 7 2012
Posts: 110
Trade or Barter

I see gold and silver as something to trade or barter for, not to sell. Like Wendy said above, it's hard to break up an ounce of gold which is why I hold silver primarily. I look at PM's as money, so the idea of selling them or exchanging them for an inferior form of currency makes little sense. I also see PM's as something that should be just one of the tools in your toolbox. Land and livestock should be your primary tools and silver just fills in the gaps for the small stuff and offers a way of accounting.

lambertad's picture
lambertad
Status: Silver Member (Offline)
Joined: Aug 31 2013
Posts: 171
Seriously? This guy is a joke.

1. What stock would you have bought in 1802 that is still around in 2006? Sure, if you were smart enough to pick the right one and kept your money invested, reinvested all dividends, and never touched it, then I guess I can't argue with this jokers logic. How many people would have had the intestinal fortitude during the great depression not to sell their stocks or perhaps need to sell their stock to buy food!

2. Storing gold is a problem? I guess it could be. I have a 250 dollar, 100-lb fireproof safe, bolted to the floor in a rather obscure location. I use my safe for storing ammunition as well as important documents that I want to safeguard. I also have some PMs in there. I feel like it's a good idea to have a safe even if you don't have any PMs, but to argue that you absolutely have to pay for it to be stored in a vault is nonsense. I also have a safe-deposit box, which is free with my wife's military checking account. Voila, that's free storage in a vault (although I don't trust my PMs to a regular bank safe-deposit box).  

3. As most PP readers know, GLD is not a surrogate for physical PMs. If you really want to invest in something that has a close association with gold prices, invest in some gold miner ETFs. Just as with GLD, you cannot cash out your miner ETFs for physical PMs, unless you cash out and take your cash and convert that into PMs.

4. What currency does this gentleman suggest you hold in a 'crisis' situation? I guess he'll be stuck holding dollars, whose purchasing power is evaporating as he is trying to spend them. Sure there is always a threat of confiscation, but that's only because gold is threat to the status quo. It's dangerous for you to hold real wealth, that's why they demand you turn it over. However, who in their right mind would turn over gold on the gooberment's demand? Back in the 30's people had more trust in their gooberment. Nowadays, not so much. If the gooberment ever demanded my gold, I'd run for the hills and never look back. The gooberment can try to do whatever it wants, even outlawing the use of gold to pay for goods/services, but they'll only create a black market. However, I live in Utah where in 2012 the state gooberment declared gold and silver to be legal tender again.

In the end, I agree with just about everything that is said above. I use PMs as insurance against collapse of the financial system and in the circumstance that paper currency becomes worthless. Gold is money, it's not currency, because it acts as a store of value. This Lund gentleman neglects to mention what 1 dollar saved in 1802 would be worth in 2006. I'm sure it is a lot less than $1.95. Also, productive land able to produce a good source of protein - chickens, eggs, beef, venison, elk, bison, turkey, pork, etc. is going to be a very good investment in deed. Managed in a sustainable way like Joel Salatan or Allan Savory, and you actually increase the productiveness of your land over time with very little input other than what the animals produce.

In my opinion, the worst investment in history would have been to accumulate dollars and hold them in a non-interest bearing account. There are other examples, Zimbabwe, Venezuela, the Mexican Peso, etc. and they were all fiat currencies. So, maybe I should say that the worst investment in history would be to trust your goobernment to carefully manage your fiat currency over a long-term horizon (30+ years).

Time2help's picture
Time2help
Status: Diamond Member (Offline)
Joined: Jun 9 2011
Posts: 2768
LOL

Just....LOL.

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