Ever since I have I have been interested in finance, I have met people who predict the end of the monetary system as we know it. In such a horrific scenario, gold would be the only valid currency. I believe, if the world ever came to that scenario, the things of real value would be guns, ammo, canned food and a fishing pole.
I think investing in gold is a dumb idea for the following reasons:
- Gold is a non producing asset. It’s not like investing in real estate where you can rent your property, investing in land of cattle where you see your investment grow. It’s not like stocks or bonds where you will get a return for your money. No, gold is just a dumb metal which just sits there and do nothing.
Most people who invest in gold, they do it through an exchange. If ever, the stock market fails and all the institutions around it, the same thing will happen to gold investments. Gold holdings will evaporate just like all the stocks and bonds. When you invest through an exchange, you are only holding bits and bites in a computer screen. No one is going to come to your house and deliver bars of gold.
- By law, Canadians and United Staters (misspelled on purpose) are not allowed to hold bars of gold. They can only hold gold coins (which are exchanged as collector items at a high premium) or jewelry. If ever there is no rule of law where the whole financial system has failed, there will not be rule of law to protect you from a person who can take it away from you by violence.
- Opportunity cost. Many gold bug pundits recommend holding about 5% of your portfolio in gold. If gold is not going to save you from financial Armageddon, if you can not convert it into tangible bars of gold, then holding any gold at all, even 1% of it will have an opportunity cost of investing that money into an asset which can provide a real return.
- If you hold physical gold, you have to protect it and insure it, this means that your gold will become a recurring expense. After doing you cost analysis, you will be worse off year after year.
We have to have faith in humanity, we have to believe that our social system will protect us from the chaotic scenario where gold could become a real currency. If we continue believing in the rule of law, very few investments can do better than the stock market.