{"id":78082,"date":"2020-04-28T12:45:06","date_gmt":"2020-04-28T19:45:06","guid":{"rendered":"http:\/\/getrichslowly.org\/blog\/?p=78082"},"modified":"2023-12-05T14:15:07","modified_gmt":"2023-12-05T21:15:07","slug":"investing-in-gold","status":"publish","type":"post","link":"https:\/\/www.getrichslowly.org\/investing-in-gold\/","title":{"rendered":"Is buying gold a good investment? Why I don’t invest in gold"},"content":{"rendered":"

Over the past month, I’ve read a lot<\/em> of articles about the virtues of investing in gold. Especially in Facebook forums, there’s a lot of talk about how gold makes a great long-term investment. (Fortunately, I haven’t seen any comments like this in the GRS community on Facebook<\/a>.)<\/p>\n

Whenever the economy gets turbulent, the goldbugs come out in force. They shout from the hilltops that the world is doomed and that the only safe haven is gold. And I’ll admit, their arguments can sound pretty convincing.<\/p>\n

When I started this site in 2006, I felt unqualified to comment on gold. I hadn’t read much about it, and I didn’t feel educated enough to offer an opinion. That’s changed.<\/p>\n

Now, after fifteen years of reading and writing about money, I know enough about economic history and I know enough about gold as an investment to have what I believe is a (somewhat) educated response to this subject. And that response is this: Gold makes a lousy long-term investment<\/a>.<\/p>\n

Today, let’s have a discussion about the pros and cons of investing in gold while using my own opinion as a starting point. (And note that this article contains my opinion<\/em>. It’s backed up by some facts, but it’s still my opinion. Don’t take everything that follows as gospel.)<\/p>\n

Put simply: I’m not a fan of precious metals. I have 0% of my investment dollars in gold and silver, and I expect that to hold true for the foreseeable future. It’s my opinion that gold is a bad investment right now.<\/strong> Let me explain my reasoning.<\/p>\n

Before we dive into the meat of this article, it’s important to understand that I’m not<\/em> an economist, and I’m not a gold expert. But for the past fifteen years, I’ve made a career out of personal finance, and gold is one tiny part of that subject. The core of this article was originally published here on 10 May 2011, the last time the goldbugs were out in force.<\/strong> This update contains substantial revisions. Also, please note that many of the comments on this article are from its original publication in 2011.<\/p><\/blockquote>\n

<\/span>The Gold Standard<\/span><\/h2>\n

Many folks dislike our current monetary system because it’s based on fiat currency<\/a>. That is, a dollar is worth an arbitrary amount because the government says so. It’s not based on anything concrete. Plus, the government can add and remove cash from the money supply at will, which affects the dollar’s value.<\/p>\n

U.S. dollars — and other world currencies — were once backed by gold. Under the Gold Standard, you could ask a bank to convert your paper money to gold at the legal rate (whatever that might be). In order for the government to print more money, they had to have the gold to back it.<\/p>\n

Proponents of the “Gold Standard<\/a>” argue that since the U.S. abandoned it in 1933, the dollar is more susceptible to inflation. That’s true. But the Gold Standard didn’t eliminate inflation, and it created other problems besides.<\/p>\n

I am not<\/em> an economist, and I struggle when it comes to economic theory, but my understanding is that much of the run-up to and aftermath<\/a> of the Great Depression<\/a> was thought to have been caused by the Gold Standard<\/a>. Under the Gold Standard, currencies were much more susceptible to speculation and devaluation, which could lead to runs on the banks. That’s why the U.S. abandoned it. And it wasn’t only the United States that did so. Not a single country in the world uses the Gold Standard anymore.<\/strong> Until recently, most economists and politicians considered it a deserved relic.<\/p>\n

Note:<\/strong> Though it’s long, this 2004 speech from Ben Bernanke about money, gold, and the Great Depression<\/a> is interesting, and explains why we’re not likely to ever return to a Gold Standard in the U.S.<\/p><\/blockquote>\n

<\/span>The Intrinsic Value of Gold<\/span><\/h2>\n

Some proponents of gold like it because they say it has intrinsic value. That is, they say that gold has value in and of itself. (Kevin McElroy does a good job explaining this concept<\/a> at The Street.)<\/p>\n

Goldbugs would have you believe that when diaster strikes — we enter a post-oil economy, we’re nuked by terrorists, dinosaurs escape from Isla Nublar<\/a>, or a new virus wipes out half the world population — that paper money will be worthless and we’ll all be trading in gold. Because of its intrinsic value, it’ll become a form of currency. I’m not convinced.<\/p>\n

Let’s say I’m a shopkeeper. I have a minimart and I have a shotgun to defend my stock from looters. If we’re in some sort of post-crisis world where dinosaurs roam the earth, I doubt I’ll want your gold. It’ll be just as worthless (or as valuable) as paper money. Why? Because in reality, gold too is fundamentally a fiat currency. That is, people have assigned it an arbitrary value. That value vanishes in a crisis, just as the value of paper money does.<\/p>\n

If I’m a shop owner in this situation — or I’m your neighbor with a vegetable garden — I’m going to be want to be paid with something real<\/em>, something like a carton of eggs or some shells for my shotgun.<\/p>\n

In other words, I<\/em> don’t think much of gold’s intrinsic value. To me, assigning value to gold is just as arbitrary as assigning value to anything else. If we’re in a real crisis, I’m not convinced that gold’s going to save the day. This is just one more reason I’m not investing in gold. (Again, this is my opinion<\/em>. You may disagree.)<\/p>\n

Tip:<\/strong> For a more coherent and educated take on this subject, read this essay on why gold does not have intrinsic value<\/a>.<\/p><\/blockquote>\n

My first two objections to owning gold are based purely on theory. Nobody knows for sure what would happen if we returned to the Gold Standard. If dinosaurs roamed the earth, we’d have more important things to worry about than the form of our currency. But I have other, more concrete objections to investing in gold right now.<\/p>\n