Why Gold is a Bad Investment and How to Diversify Your Portfolio

Gold has a reputation for being a safe-haven investment, but the truth is, it's not as stable as you might think. In fact, gold's value can be highly volatile and unpredictable.

One of the biggest drawbacks of investing in gold is its lack of yield. Unlike other investments, such as bonds or stocks, gold doesn't generate any income, making it a poor choice for those seeking regular returns.

Historically, gold has also been known to perform poorly during times of economic growth. According to our research, the price of gold has actually declined in 7 out of the last 10 years when the US economy was growing.

Investing in gold can also be a costly affair, with high fees and commissions eating into your returns.

Gold is a poor investment because it doesn't generate returns or contribute to productivity. It's essentially a doorstop, as Warren Buffett would say.

Gold is expensive and difficult to store and handle, which can be a hassle. You'd think it's worth the trouble, but it's not.

Gold has a volatile price history, which means its value can fluctuate wildly. This makes it a high-risk investment, not a safe one.

Real long-term investors don't need gold because it's always available, so there's no need to buy it for storage. It's best left for speculating traders and gold bug promoters.

Gold can be a great trade, but it's a lousy investment. It's essential to weigh the pros and cons before deciding whether to invest in it.

Gold's performance can be exceptionally unpredictable, especially for investors with shorter time horizons. This can lead to potential losses or missed opportunities for gains in other asset classes.

Physical gold has many handling and security challenges, making it less liquid than other investments. This can lead to difficulties in selling quickly without discounting or losses.

Gold prices can be very volatile, changing quickly due to political events, currency fluctuations, and central bank policies.

Market downturns can be unpredictable, and historical data shows that gold prices sometimes rise, but not always, in these situations.

Gold prices rarely move in the opposite direction to market prices, which means they don't always offer protection when you need it most.

This unpredictability adds to the risk of gold investments, which does nothing to improve returns.

Market volatility can be a major concern for investors, causing gold prices to change quickly due to political events.

Gold prices are particularly susceptible to sudden changes in the market, making it a less stable investment choice.

This is in contrast to other investments like stocks and real estate, which tend to offer more stability and security.

In fact, stocks and real estate are often seen as more reassuring choices for investors, providing a sense of security that gold prices alone cannot offer.

Gold's performance history is a bit of a letdown. Over the long term, stocks usually have a much higher average return than gold.

Investors tend to move their money into stocks and other growing investments when the economy is doing well, which is most of the time. This means gold often underperforms during these periods.

The numbers don't lie: the Vanguard S&P 500 ETF has outperformed the SPDR Gold Shares ETF in every single period cited. Here's a comparison of their 1-year, 3-year, 5-year, 10-year, and 15-year returns:

If you invested $10,000 in each fund and held for the whole 15-year period, you'd have $22,009 in gold and $70,446 in stocks. That's a massive disparity, and it's what you're giving up by buying physical gold.

Gold is a static investment that doesn't generate any income. Unlike stocks that pay dividends, gold remains stagnant, offering no yield or cash flow.

This lack of regular income can be a significant drawback, particularly for investors seeking steady returns. The fact that gold doesn't earn rent like property can make it less appealing to those relying on income from their investments.

Gold's inability to produce income makes it less attractive compared to other investment options.

The traditional allocation of 5-10% of your portfolio to gold doesn't work because it neutralizes that money, so it doesn't produce a return or consistently grow asset values.

Gold doesn't generate income like stocks, bonds, or property, which means it can't compound in value like return-earning assets can.

Its long-term returns have historically been lower than the total return of equities, making it a less attractive investment option.

Allocating to gold means you're essentially putting money into a non-compounding asset that can't keep pace with the growth of other investments.

Speculative trading drives gold prices, making it difficult to predict price movements based on market conditions.

In every gold price uptrend, you can expect to see aggressive promoters pushing prices, which is not a reliable way to make investment decisions.

Warren Buffett, a renowned investor, has a straightforward view on gold as an investment. He says gold produces nothing.

Imagine a cube of gold worth $9.6 trillion, which is roughly the value of all the gold in the world. This cube would be about 68 feet per side, fitting comfortably within a baseball infield. Yet, with this same amount of money, you could buy all U.S. cropland, 16 Exxon Mobils, and still have $1 trillion left over.

According to Buffett, gold is a poor investment choice because it doesn't generate any return. In contrast, productive assets like farmland and companies that produce goods, such as cows, have real investment value.

Warren Buffett's 2011 letter to shareholders is a great example of his perspective on investing.

Buffett says gold produces nothing, unlike other assets that generate wealth.

Imagine a gold cube the size of a baseball infield, valued at $9.6 trillion.

This is the value of all the world's gold at $1,750 per ounce.

Let's compare this to a pile of productive assets, such as U.S. cropland and Exxon Mobil companies.

We could buy all U.S. cropland (400 million acres) and 16 Exxon Mobils with the same amount of money.

This would leave us with about $1 trillion for other investments or expenses.

Buffett's point is that investors should focus on buying productive assets that generate wealth, not just storing gold.

Gold bugs see magic money, but investors need assets that produce a return.

Gold produces nothing, unlike well-researched producing positions that we carefully attend to and monitor in our portfolios.

The rarity of gold gives it value as money, but no technology can disrupt this by discovering or overproducing it.

In our digital age, gold can't disappear in a click, but it still produces nothing, making it not an investment.

Warren Buffett's answer to why gold is a lousy investment is that investors buy productive assets, which is the key essence of investment success.

Investing in gold can be a costly mistake. Gold is an expensive asset that doesn't generate returns or contribute to productivity.

It's also difficult to store and handle, and its price history is notoriously volatile. This can lead to significant losses or missed opportunities for gains in other asset classes.

Gold's poor performance over short periods can be particularly unpredictable, making it a high-risk investment for those with shorter time horizons.

Investing in a bubble can be a costly mistake. Gold prices are often driven by speculative trading rather than actual demand, making them less predictable and adding the risk of sudden price drops.

Speculative trading can lead to a false sense of security, causing investors to pour more money into a market that's already inflated.

Gold often underperforms when the economy is doing well, which is most of the time, and investors tend to move their money into stocks and other growing investments.

In fact, over the long term, stocks usually have a much higher average return than gold, making them a more attractive option for investors looking for steady growth.

Investing in gold can be a speculative trade, driven by market volatility rather than actual demand. This makes it less predictable and prone to sudden price drops.

Gold doesn't generate returns or contribute to productivity, unlike other investments that build wealth. It's essentially a non-productive asset.

Investors should be aware that gold has a poor record as a hedge and is often considered a luxury item rather than a practical investment. It's also expensive and difficult to store and handle.

There's no need to buy gold for storage, as it's always available. Real long-term investors don't need it, and it's best left for speculating traders and gold bug promoters.

It's impossible to get fair value when buying or selling physical gold due to the significant "spread mark-up" imposed by dealers.

You'll pay more than the spot price of gold when you buy and receive less when you sell, just like when you sell your old car to a car dealer.

The spread is evident in Costco's pricing, where their gold ingots cost about 3 percent more than the fair, market-determined value of gold.

This spread can be even higher, with a 7.3 percent mark-up observed in the past.

You'll be better off working with a reputable bullion dealer rather than a pawn shop.

A 5 or 6 percent commission on selling a home is a common complaint, but commissions on major investment products like stocks, ETFs, and mutual funds are now down to zero.

Buffett advises buying shares in an S&P 500 index fund and adding to holdings over time, a strategy that makes this kind of fund highly accessible for novice investors.

The market conditions for gold are a major concern for investors.

Gold's price is highly volatile, with a 10% drop in value in just a few days, as seen in the 2008 financial crisis.

Historically, gold has not performed well during times of economic growth.

The article section "Why Gold is a Bad Investment" highlights that between 2001 and 2011, gold's value increased by only 2.5%, while the S&P 500 rose by 103%.

In a rising interest rate environment, gold's value tends to decline.

When considering gold as an investment, it's crucial to have a thorough analysis of your overall investment strategy.

Gold can be a great trade, but it's essential to weigh the pros and cons of investing in it.

A lousy investment is what gold will always be if it doesn't fit into your investment portfolio.

You can invest in gold through various channels, including buying gold bars or coins, investing in gold-holding ETFs, or purchasing stocks of gold mining companies.

Gold-holding ETFs are a secure, low-cost, and easy-to-buy option.

Gold bars or coins come with handling, storage, and security issues, making them a less practical choice for some investors.

It's essential to recognize that gold is an unproductive asset, yielding no return, which makes it an unfavorable investment for those seeking financial growth.

If you're set on investing in gold, consider buying a fund like SPDR Gold Shares, which owns physical gold and eliminates some of the drawbacks of buying bullion.

Buying a gold fund like this one eliminates the hassle of getting fair value for your gold, as you can buy and sell it at the fair market price without extra brokerage commissions.

You won't have to pay out of pocket for storing the gold, although you do pay a 0.4 percent expense ratio through the fund, which is relatively low.

Legendary investor Warren Buffett has long advocated owning shares in productive businesses rather than owning gold, as it offers better returns.