Investing In Gold Is No Longer the Safe Option
Investing in gold used to be seen as the safe option for investors.
When things got rough and stocks underperformed, putting some money into gold helped to mitigate the failings of the market.
But that’s no longer the case.
No Longer Fundamental
Gold used to be the fundamental product on which the global financial system was built. This gave it an inherent value, as everything came back to gold.
That’s no longer the case. It’s decades since major economies moved away from the gold standard.
Though governments and banks still hold reserves of gold as part of their economic strategies, it’s not the fundamental tool it was.
While it’s not longer the exceptional object it once was, gold hasn’t been able to become an ordinary asset either.
People haven’t got out of the habit of seeing it as something special. As a result, its value is shaped by sentiment rather than supply and demand.
The price of gold is a matter of investor whim.
Not an Investment
Perhaps most critically, gold doesn’t act like an investment. It acts like a currency.
Like any other currency, gold acts as a store of value but does not provide a return on value.
Unlike stocks and bonds, which are investments, it won’t allow you to grow your wealth. In fact, the premium for buying and selling gold can mean that it provides a negative return, even before considering the possibility of its value dropping – which it regularly does, just like any currency.
Gold is a better store of wealth than most currencies. It’s not vulnerable to inflation in the way that they are.
Even taking into account the extra costs of storage, either through home insurance or paying for professional safe storage, it will provide you with more security than pounds or dollars.
But saying that it’s not the worst investment option is far from labelling it as a good one. Investing in gold just ain’t what it used to be.
Long-Term Trends
Advocates for gold will point out that, though it does badly when the market does well, the inverse is also true. Having gold can be good when the market is doing badly.
While there’s some truth in that, it’s an approach that relies on short-term investment tactics, and short-term tactics are the road to panic selling and unnecessary losses. For long-term investment, we need to look at the big picture.
Thanks to its high volatility and lack of returns, gold doesn’t hold its value compared with stocks and bonds in the long term.
Over a five-year period to March 2018, the average annualised return on gold was a 4% loss.
The annualised return for investment in the S&P 500 Index, on the other hand, was a gain of around 13%.
While gold’s higher standard deviation meant that its real results varied more, allowing opportunities for profit, the overall picture was poor compared with stocks and bonds.
It’s said that gold’s lasting value is shown by the fact that an ounce of it will always buy you a good suit.
It’s a rule that’s true from the days of ancient Rome through to modern Britain.
But the value of a good suit as a proportion of economic wealth is far lower than it once was.
We have so many other things in our lives that a good set of clothes doesn’t represent the wealth it once did. The suit example shows gold’s decline, not its continuing relevance.
Further Complications
For those set on investing in gold as a resource, the more profitable route is to invest in mining companies or those that finance them.
At this point, you’re no longer investing in the safe bet, magical currency resource that gold represents in many imaginations.
You’re just buying stocks in a company that may or may not succeed.
At that point, the gold angle is no more inherently valuable than an interest in tech, freight, or agriculture.
It all depends on the company’s strategy and its market.
Investing in gold is further complicated by the conditions of modern gold mining. Much of the world’s accessible supply of gold has already been extracted.
This leaves modern mining companies with three strategies, all of which can be combined – extract from less profitable seams with limited gold in them; increase profits by employing cheap labour in bad conditions; reduce the difficulties of extraction by using environmentally harmful mining techniques.
This makes investment in gold tricky for ethical investors and means that any gold company may be vulnerable to the extra disruption and scrutiny that protests can bring.
For an investor looking to grow their wealth, investing in gold isn’t a safe investment option.
It’s just a damage limitation exercise for switching into currency, a way of ensuring that you miss out on long-term returns.
Paul Connolly
Paul Connolly has been a journalist for more than 20 years, as a reporter and editor for Argus Media, Reuters, The Times, Associated Newspapers and The Guardian. He has covered Islamic Finance for Reuters in the 1990s. Paul has since helped launch three newspapers, as well as reported from Tokyo, Los Angeles and Stockholm.
