A Short Rant on Gold

Dear gold bugs

If you've interested in finance or investing you have seen these types of articles recently. Frankly, I'm sick of it. But I can understand why people are talking about it. Gold has been rising quite rapidly recently and anything that increases sharply in a short matter of time will get finance bros and media attention. If ISIS made crypto and it rose +500% in a week it would be getting CNBC headlines and be in every crypto bros portfolio.

Above looks pretty impressive right ? However if you zoom out it doesn't look very impressive.

Gold doesn't look so attractive when you zoom out. +0.5% return per year does not look to attractive when you compare it with other asset classes like stocks.

As an investment gold historically has been lackluster. I have never had the slightest interest in owning gold. I think it's a much better life if you can identify great businesses at fair prices, buy them and wait. On average I think the people who prefer stocks over gold tend to not only do better financially but they live a better life. The idea you want to own a financial asset that basically only goes up if the world goes to hell doesn't make much sense to me. If everything goes to hell I would rather own a gun than gold. Furthermore gold bugs are very doom and gloom type people. The only time it makes sense to put your money into gold is if you're attempting to escape a violent dictator.

As an investment gold doesn't make much sense. Suppose you got some inheritance from your loving Grandad, would you rather have a $500,000 farm or $500,000 worth of gold. Over time, the farm produces income from selling corn for instance and with that income you can buy more land which will allow you to plant more crops and profit more overtime. However if you chose the gold it would just sit there and do nothing. You can rub it and look at it but it won’t produce anything. A productive asset like a farm will always do better than gold.

I also don’t like gold because it's just speculation. You dig it out of the ground, melt it down, and store it back underground. Unlike a farm or business, gold doesn’t generate cash flow. Its value relies solely on the next person paying more for it. That’s not investing, that's hoping. Real investments produce something. Gold is a bet on fear, not productivity. If you’re counting on price appreciation without any underlying output, you’re not investing, you're just speculating on crowd psychology. As an investor you never want to speculate. Even on an asset class that goes back thousands of years. A small leak can sink a great ship, and as an investor you don’t want to make any speculative bets. To be fair I don't think gold is going anywhere. People will keep on wearing it around their necks, teeth and fingers. I just want to get across that gold as an investment is a lousy one.

Gold are sometimes in portfolios as a hedge against inflation or market volatility. But here’s something to consider. Instead of holding gold, why not invest in businesses that have inflation proof characteristics? Companies like Coca Cola or Hermès have pricing power, brand loyalty, and the ability to grow earnings even as costs rise. And for those who view gold as a volatility hedge ask yourself this. Would you rather earn a smooth +11% per year for 40 years, or a bumpier +14% annually over the same period? Personally, I’ll take the bumpier road and compound more wealth.