Why I am Almost Always Bearish on Investing in Physical Gold and You Should be Too

Evan’s Note: This Post is from a new blogger who was able to highlight why I don’t like gold as an investment much more eloquently than I would have been able to. Scott Hopkins is the author of Youthful Investor. Besides long walks on the beach, Scott enjoys dividends, low P/E ratios, commission free ETFs and dinners with Benjamin Graham. Discover his secret affair with penny stocks and wild alternative investments on hisĀ investing blog.

Precious metals are the hot commodity of investing (pun intended) as more and more, cash for gold stores pop up around us and we are bombarded with the infomercials that demand we own gold for the coming economic crash.

The so-called experts and so-called old school conservative investors, brag of the rich history of gold and other precious metals. Although, gold and other precious metals may have value, their lack of liquidity and inability to produce profits of their own, make them a sour investment for many people.

History Inflates the Value of Gold

History plays one of the most important roles in the hype of gold to this generation of investors. Unlike stocks, gold has a history going back several thousand years. It has evidence of being valuable in just about every holy book and was an incredibly motivating power in the first wave of colonialism to reach the Americas.

In the not too distant past, gold along with silver was the only currency of value when paper currencies crashed in the German Weimar Republic and the United States during the Great Depression. We all remember the powerful images fed to us in grade school of poor unemployed men with wheel barrows full of cash to pay for groceries. Or maybe we were reminded of the legend that women would keep the fire going in the house using US Dollars as kindling during the Great Depression.

History plays an important role in the emotional investing side of gold.

Gold is not Really and Investment

I might be making a lot of people mad as they read this but gold should be considered more of a currency or speculation at best, not an investment. My definition for an investment, iwhich I think many will agree with is: money or the promise of money to be paid for an asset that seeks gains through interest, income, profits, dividends, etc. This definition accommodates true investments like stocks and bonds, but also real estate, small businesses and even education.

Gold on the other hand, does not produce anything. It is not responsible for generating a dividend. It cannot use its current capital to make more or acquire more. Even the most lousy stocks have the ability to do these things. Gold is just a sitting duck. It’s mostly just a product of supply and demand.

Gold is a Pain in the Butt to Hold on To

When you buy your gold from an infomercial and it is shipped to your home, you now have to worry about storage. Where will you put it? You will likely want a safe for it and for other precious metals you buy. More questions arise though. Are you going to have to get insurance on the gold you have stored in your home? Do you tell other people about how you are invested in gold, just like you do with that new penny stock you found? How will you protect against theft?

Many other investments have the awesome benefit of not requiring physical ownership in order to benefit. Stocks, bonds and ETFs are managed electronically, cutting down on the buy and sell costs and making it easy for an individual to own equities all over the world in one small personal account.

Who’ll Buy Your Gold When you want to Sell?

Historically, gold has performed as a crowd investment. By this I mean, when the price is on the rise, the crowd is buying, when the price is falling, the crowd is selling.

I’m not saying it is impossible to sell gold for a profit in a bear market but consider the sales pitches that snagged you on gold in the first place. Do you really think a neighbor will have the money to buy your gold collection when you decide you’re out? If we end up in an economic meltdown where cash becomes worthless do you really think your local grocery store will sell you food, clothing and medicine for gold? What does gold offer them? They probably need those essentials just as much as you do.

Simply put, gold has a liquidity issue. Most stocks can be sold on a moments notice. Even many penny stocks, OTC and Pink Sheets can be sold same day.

Forget going back to the jewelry store you bought from or the Cash for Gold kiosk at your local mall. You’re going to get a fraction of the market price and then an additional discount associated with their shipping and melting fees.

Gold Sells for Awful Premiums for the Average Investor to Benefit

Advocates of gold will often cite the spot price for how much they should pay for an ounce of gold. However, many individual investors know that buying just a few ounces of gold cost far more than the spot price per ounce. Unlike brokers, bullion dealers must attach a retail price to the item, as it is being sold from them, not on their behalf like stocks. The bullion dealer must make up the costs of buying and holding the gold in the first place. Add to that the cost of shipping and insurance.

Those who cannot afford to buy an ounce or more at a time will turn to more affordable options like eBay or a local jewelry store, where they will actually pay even more. Ebay is the speculation capital of the internet marketplace where loads and loads of junk collectables are bought and sold daily. Emotional bidding causes many precious metals to go above and beyond their current price.

To get around that some will buy gold jewelry, forgetting that a premium is attached to the style and design of the jewelry. Worse, when it comes time to sell they find out that carat gold is nowhere near as pure as bullion. Saddened they unload their copper filled gold for far less than they paid.

Conclusion: I Don’t Like Physical Gold but There are Other Options

Don’t get me wrong, I love the look of a gold chain or bracelet, but I have a hard time paying what the market thinks it’s worth. Besides that I have trouble with the storage, liquidity and insurance of physical gold as an investment. If you feel the same, an option for you might be in securities that hold gold. An ETF like GLD, is the most popular option for investors. It breaks those barriers to entry, security issues, and is the most liquid gold investment available.

 

3 Responses to Why I am Almost Always Bearish on Investing in Physical Gold and You Should be Too

  1. Thank you! Couldn’t have said it better myself.

    Gold bugs I have met tend also to be folks who see Apocalypse lurking around the corner. If you really believe the world is going to He** on a skateboard, you’d be better off to stock up on things you can barter: cigarettes, liquor, propane, and food. You can’t eat gold. Can’t smoke it, either.

    That said, I know a woman who, as a child, had to walk out of Romania and across Europe to reach a refugee camp, from which she and her family eventually shipped out to Israel. To bribe border guards, they used the mother’s gold jewelry, which they’d hidden inside bars of soap and carried in their single suitcase. In the event of war or social unrest, a little gold could be useful.

  2. Physical gold is kind of a safe incvestment and the risk of price drop is very low when compared to stocks and foriegn exchanges.

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