As talk of a market correction continues to circulate, many people are trying to find ways to diversify their investments and protect themselves as much as possible. Inevitably, when there is fear that a downturn is on the horizon, investors start to think about the most stable, concrete investments they can make. Near the top of the list is usually something that has has been around for centuries and therefore seems very dependable to most people: gold. If you're trying to get your financial house in order, you may be wondering if gold is a good investment. The answer to that questions is no, and here's why:
Gold Has No Inherent Value
I'm with Warren Buffett on this one when he states that gold is a speculation, not an investment. True investments have attributes. If you buy stocks, for example, you own a share in a company. The value of that company is based on the forecasts of the future earnings of that company. Because gold has no future earning potential, the only "value" it has is what someone is willing to pay for it on any given day. Even if a market correction happens, you will still own stock in a company and it's likely that stock will recover over time. But if no one is willing to pay you more for your gold than what you invested in it, you are holding an 'asset' that will not grow.
Gold Produces No Income and Costs Money to Hold
Unlike stocks, gold produces no dividends or opportunities for cash flow. Stocks produce income as well as allowing you to retain shares in the company as you are getting paid that income. Gold, on the other hand, actually costs you money. Why? First, you have to store it. You can't keep pounds of gold just hanging out in your living room. It needs to go into a safe or storage facility equipped to handle it and keep it secure. You'll also need to insure it, which costs even more. While stocks grow and throw dividends your way, gold languishes and needs taking care of.
Gold Has Few Uses
Unlike other precious metals like silver and copper, gold has few practical uses. This means that little is needed for things other than decoration, so the supply does not dwindle. As we continue to mine more gold, the stores increase. We all know the rules of supply and demand, right? The more gold that's out there, the less it will be worth. And until we find a way to put it to good use, we'll simply keep stockpiling more.
Sales of Gold Are Based on Fear
When people think the U.S. or European economy is getting shaky, they get scared and are subject to the fear-mongering of gold sellers who insist buying gold is the best way to protect themselves should a crash happen. Brokers who sell gold in the form of coins, bullion or stocks in mining corporations make money off commissions. It benefits them to sow the seeds of fear in investors because they know it leads to more commissions for them. Working with a fee-based independent advisor is the best way to cut through the hype and get advice that is based solely on what's best for your financial situation.
Whether you've been investing for years or you've just started to figure out the markets, it can be easy to let fear take over and revert back to the safest investment you can think of. However, when you really dig into it, you'll see that gold isn't really that safe and that you will almost always be better off putting your money into stocks and mutual funds.
Have questions or comments about investing in gold? Please leave them below!