All That Glitters: Why I’m Not Investing In Gold
All That Glitters: Why I’m Not Investing In Gold
By J.D. ROTH| Published: 28 April 2020
Over the past month, I've read a lot 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.)
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.
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.
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.
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. It's backed up by some facts, but it's still my opinion. Don't take everything that follows as gospel.)
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. Let me explain my reasoning.
Before we dive into the meat of this article, it's important to understand that I'm not 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. This update contains substantial revisions. Also, please note that many of the comments on this article are from its original publication in 2011.
The Gold Standard
Many folks dislike our current monetary system because it's based on fiat currency. 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.
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.
Proponents of the “Gold Standard” 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.
I am not an economist, and I struggle when it comes to economic theory, but my understanding is that much of the run-up to and aftermath of the Great Depression was thought to have been caused by the Gold Standard. 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. Until recently, most economists and politicians considered it a deserved relic.
Note: Though it's long, this 2004 speech from Ben Bernanke about money, gold, and the Great Depression is interesting, and explains why we're not likely to ever return to a Gold Standard in the U.S.
To continue reading, please go to the original article here: