Why Gold is not a good Investment

When the economy crashes and traditional Investments bleed value, investors and Goldbugs alike hop into the most famous yellow metal around. But whether buying Gold is a good idea or not is hotly debated among economists, investors, and Precious metal enthusiasts.

Naturally, at Satori Traders we think that Gold’s pretty great, given that we offer Gold IRAs and all. But just because Gold can be a good Investment doesn’t mean that it always is. Plus, it’s absolutely true that Gold, like any other asset, isn’t an appropriate Investment for absolutely everybody.

How much is Gold worth?

No, not in a pawnshop or on a specialty dealer’s website or made into fine jewelry. If you were to price Gold in a vacuum, what’s the metal itself worth?

What, you can’t answer that?

Well, you’re not alone.

Gold is unique in that its worth isn’t built on contractual obligation or underlying business performance like Bonds or Stocks. Nor does it provide shelter, land value, or rent like Real Estate. It doesn’t even derive its value secondhand like futures contracts do.

Instead, Gold’s value is based on capitalism’s defining principle: supply, demand, and buyers’ willingness to part with their cash. And as it turns out, there’s only so much that scarcity can do to prop up a non-essential commodity’s price.

That’s not to say Gold is useless. Its unusual metallic profile makes it ideal for certain industrial purposes, and it’s commonly found in high-end jewelry and artwork. Even there, however, Gold’s valuation remains murky at best.

Unfortunately, that means when the market decides the Precious metal is “overvalued” for whatever reason, you can lose hundreds of dollars per ounce overnight. 

Consider Steel, or Aluminum, or Copper. You see these metals melted and molded around you daily, from conductive wiring to streetlamps to kitchen trays.

By contrast, seeing Gold is far less common. Most people’s contact with the yellow metal is limited to jewelry, Coins, or minute dustings in their electronics.

First, despite Gold’s relative rarity, the global supply isn’t at risk of being used up. In other words, there’s no massive demand-side pressure to support the metal’s price through downturns.

Second, because Gold is readily replaceable for most industrial uses, companies and individuals often turn to cheaper alternatives when the economy falters. That further lowers demand, which tamps down prices and can even force mines to artificially inflate prices by reducing production.

Gold shares a few similarities with cash. For some, that’s damning enough evidence for why Gold is not a good Investment.

One big similarity is that Gold doesn’t produce anything – no interest, no dividends, no profits of any kind. The only time you’ll see a return on physical Gold is when you sell the metal for a profit. (If you can turn a profit, which isn’t a guarantee.)

History shows that investing in a diversified Stock Portfolio can net 7-10% in average annual returns over time. Even less-profitable Bonds have historically returned 4-6% per year.

That’s not to say that these returns are guaranteed – they’re averages over decades. For instance, in 2008, the Dow Jones Industrial Average lost almost 34%. But in 2013, the same index returned nearly 27%.

The Precious metal saw its greatest annual return in 1979 when its price soared 133% amid sky-high inflation and recession fears. But the metal has also seen long periods of decline and stagnation.

For example, consider Gold’s inflation-adjusted peak of $781.06 in April 1934. After topping out, the metal embarked on a decades-long journey of losses and minor gains. The metal wouldn’t see that inflation-adjusted price again for forty years, until it broke its dry spell at $803.46 in June 1973.

In other words, if you’d bought Gold in 1934, you would have suffered four decades of lost value and opportunity costs as Gold failed to keep pace with, let alone exceed, price inflation.

You’ve likely heard that Gold’s great power is its ability to cling to value when the economy sours. That’s true – but not because Gold itself has some recession-eating superpower. Simply put, Gold can (but doesn’t always) grow more valuable because investors want it to.

When economies or markets dip, investors shovel Gold into their Portfolios. This speculative rush spikes demand, which drives up Gold prices. For investors who buy early and sell at the peak, these events can be massively profitable.

U.S. investors are generally required to pay one of two kinds of capital gains taxes.
Short-term capital gains are levied when you profit from an Investment you’ve held for under a year. These tax rates are generally set at your income tax rate, which ranges from 10-37%.

Long-term capital gains are more favorable. Long-term rates are set at 0%, 15%, or 20%, based on the investor’s tax bracket.

But in most cases, Gold is taxed as a collectible. (Yes, even when you buy a Gold-backed ETF or Trust.) That subjects all Gold profits to a hefty 28% collector’s tax – far higher than any long-term capital gains tax, and well above four of the seven short-term tax rates levied in 2022.

Precious metals IRAs receive more favorable tax treatment. Capital gains on Gold held inside an IRA are taxed as regular income instead of the collectible rate of 28%. In a tax-exempt Precious metals IRA (Roth IRA) there are no taxes on capital gains.

If you need a good reason not to buy Gold, look no further than the cost of ownership.

When you buy Stocks and Bonds, you’re investing in “paper Investments.” These aren’t exactly real the way that Gold is. Effectively, you can think of paper Investments as numbers jotted down (or typed) in a nebulous somewhere.

• Where can you hold the metal so it won’t be stolen?

• How do you control Gold’s environment to reduce tarnishing?

• What kind of insurance protects against loss, damage, or theft?

• What’s a reasonable “maintenance cost” to pay someone else to store your Gold?

The answer is simple: because, for many investors, the pros outweigh the cons.

Gold diversifies a Portfolio and acts as a counter-balance to market volatility. Ideally, Precious metals should take up just 5-10% of your entire Investment Portfolio. At that level, you have enough room to play with Gold as a hedge or profit-generating Investment without jeopardizing your long-term strategy.