The Pros and Cons of Investing in Gold

Do you remember all the hype around gold in the not-so-distant past? From 2007 to 2011, the value of an ounce of gold went from about $500 to $1,800! If you would have purchased gold in 2007, you would have nearly quadrupled your investment in just five years! Now that is one heck of an investment.  Around this time, I also pronounced that you shouldn't buy gold – and it received a lot of criticism.

In the more recent years, gold has settled back down to around $1,300, and sometimes slightly less than that, so hopefully you took my advice.  But the question still remains in the back of people’s mind though, “Would it be wise to invest in gold right now?” At its current price, gold is worth $500 less than its previous high, so one would think that an increase in value could be on the horizon.

Here's what you really need to know about the pros and cons of investing in gold.

Pros of Investing in Gold

In my opinion, there are three major pros when it comes to gold investment: (1) It is a quality hedge against a down market, (2) it will still have value if paper currency inflates, and (3) there is an apparent upside to its value vs. prior years.

#1. Gold is a Quality Hedge Against a Down Market

As we all saw in 2007, when the stock market took a dive, everyone began putting their faith in gold instead. With the higher demand in gold (and with a limited supply), the price of gold went up – massively. Within the next couple of years, we may witness another steep down market, which may again increase the value of gold.

#2. Gold will Still Have Value if Paper Currency Inflates

Local currencies constantly fluctuate against foreign currencies. It’s the way of the world. Policies are in place to hold currencies steady, but they are not always fool-proof. Once a currency begins to make a downward spiral, it can be very difficult to stop severe inflation, which of course decreases our purchasing power.

Gold is often the more solid option for currency since there is a finite amount of this precious metal. If you have gold, then you are likely to hold onto more of your overall worth than someone that has put all of their faith in the banks and paper currency.

#3. There is an Apparent Upside to the Value of Gold

As I stated before, gold was once at $1,800, but now rests at a value of less than $1,300. If there is a slight blip in our economy that send fear through the nation, then gold could easily spike up to that $1,800 mark. It no longer seems far-fetched because, after all, the value has already been there before.

Cons of Investing in Gold

I used to be a huge advocate of gold and silver investing, but my opinions on this investment technique have changed, largely because of the cons below.

#1. Gold Has a Terrible Historical Return

If you went back 200 years and put $10,000 in gold, $10,000 in bonds, and $10,000 in stocks, which of these investments would come out on top? Well, if you are smart, you would probably not choose gold to be the top investment, but the astonishing part about this is how poorly it actually vs. the stocks and bonds. After 200 years…

• Your gold is worth $26,000
• Your bonds are worth $8,000,000
• And your stocks are worth $5,600,000,000!

Based on the historical returns, gold is a lousy investment.

#2. Gold is Worthless If Things Get Really Bad

As a pro, we stated that gold is a great hedge of the dollar inflated and we lose our purchasing power. This is true, but what if the currency becomes absolutely worthless and we all have to resort to trading goods to survive. What value is gold at that point? Well let’s see, you certainly can’t eat gold, so it is of little value for that purpose, and you really can’t make anything easily out of gold, so there really isn’t any value there either. Pretty much, at this point your gold nuggets and bars are only as valuable as a rock, because you might be able to throw it at something and kill it.

#3. Gold Only Earns You Money When You Sell It

The biggest con of investing in gold (in my opinion…oh, and Warren Buffett’s) is that it produces you absolutely nothing when you own it. If you want to grow truly wealthy, then you want to buy an asset that produces a passive income while you own it so that you can then buy other assets that make you even more wealthy. Warren started doing this as a boy when he bought a hunk of land. He knew the land would increase in value, but the truly great part of his investment was that he could earn an income each year from the local farmer that wanted to rent his land. After a few years of rental income, Warren could then reinvest his money into even more land and do this over and over again! This method allowed him to buy assets that gained in value, but also gave him income while he owned them!

Since gold can only provide you an income when you sell it (that is, if you sell it for more than you bought it for), I consider it to be a pretty terrible investment.

What do you think? Have you purchased gold as an investment?