It’s the gift that keeps on giving.
Today’s Farage, Fortune & Freedom email newsletter is all about gold.
Farage’s writing partner Nick Hubble says: “All you need to do to declare your own personal gold standard is own some physical gold. It’s that simple.”
Of course, it’s not that simple.
There are some very good reasons to avoid gold as an investment. Coming up in this video.
Before I get into the main reasons why gold is a bad investment, I want to debunk some statements made in the Fortune & Freedom newsletter.
Over the last 20 years, it has outperformed the stockmarket comfortably. You don’t hear a lot of financial professionals talk about this because… well, there’s no little fee to collect on it.
Going back 20 years, Gold is up 614% since then and the Dow Jones Industrial Average is up 161%.
But what about if we look at a 30-year timeframe? Gold is up 407%. But the Dow Jones is up 1,074%!! 2.5 times as much.
But wait, these returns are excluding one very important factor – dividend reinvestment.
A healthy part of the return from stockmarkets comes from the dividends (profits) paid to shareholders.
Over 20 years, the Dow Jones return including dividends reinvested is 341%, so nearly 3 x as much as the capital return only. Gold stays at 614% because gold doesn’t pay dividends – I’ll come on to talk about that in a moment.
Over 30 years, the Dow Jones return including dividends is not 1,074%, but 2,283%! Twice as much. The return from Gold over 30 years stays at 407% because it doesn’t pay dividends.
As Farage & Co have done, you can cherry-pick timeframes to make your argument stand up.
While the value of your assets might go up, down, or both over time, the gold you own probably won’t be doing anything particularly exciting.
Depends on your definition of exciting?
Gold is a volatile commodity, with price fluctuations driven by speculation.
There are times when gold does well, and times when it does poorly. Often, those bad times will last a long time.
Following a peak in 1980, gold enjoyed a 20-year bear market, after falling 60% in value.
It’s untrue to suggest that gold won’t do anything exciting. It’s typically more volatile than mainstream investment assets.
Hubble then lists a number of scenarios where gold will, apparently, go up in value; a banking crisis, high inflation, negative interest rates. Theoretically, yes, but this is back to speculation.
He then, remarkably, looks at the 500-year track record of gold.
Investment portfolios tend to have slightly shorter timeframes than 500 years. Advances in longevity are not that good yet.
The world has changed a great deal in 500 years, as has the global economy. It has changed a great deal in the past six months!
As I see it, gold is like insurance against monetary megalomaniacs at the Bank of England and Exchequer. Its purpose is to help you sleep at night, even when your other investments are bouncing around all over the place. And to protect you from the long-term debasement of the pound – better known as inflation.
Again, pitching people against institutions, it’s what Farage likes to do. Monetary megalomaniacs?
Help you sleep at night? Only if you can ignore the price volatility (or the person breaking into your safe).
Protect you from inflation – gold might keep pace with prices, but it’s unlikely to ever deliver value over and above rising prices; only investing in real assets can do that.
So, three reasons why investing in gold is a really bad idea.
1 – It doesn’t pay dividends
I’ve already shared some figures with you about the power of dividend reinvestment.
Gold is a non-income producing asset, and therefore not an investment at all, but a speculative asset.
You can indirectly invest in gold via mining stocks, which can pay dividends, but you probably already hold these in your equity portfolio.
2 – Gold has no utility
Like bitcoin, there’s little intrinsic value in gold.
There are some industrial uses, but something like 78% of gold production is for jewellery making.
Gold, while pretty to look at, is rather useless.
3 – Gold will make you scared
Gold bugs, those who peddle gold as the answer, live on fear.
Fear is what drives up the price of gold – fear of a global banking system collapse, of oppressive governments, of the end of fiat currency.
If you’re buying gold because you’re scared, you probably need to hold physical gold (coins, not bars – because coins will be easier to trade if the world ends – in fact, silver coins are probably more practical if you’re trying to bribe your way past a roadblock or barter for a side of a cow) – and storing physical gold comes with high costs and high risks.
So, three good reasons to avoid investing in gold. There are many more.