The notorious debate continues in 2021—is gold a good investment? Financial experts have debated this for centuries. Different investing philosophies cite various reasons for or against investing in gold.
But it is 2021 now. We’ve seen a great deal of market turbulence over the past few years and many are worried about what the future of investing will look like. Given the current financial situation, let’s explore if gold is a good investment in 2021.
What Makes a Good Investment?
To answer the question is gold a good investment, let’s take a step back and define the goal of investing. What makes a good investment anyway?
In addition to an investment appreciating in value, a good investment will also pay you. For example, the following are good investments because they pay you.
- Real estate investing pays you rent
- Bond investing pays you yields
- Stock investing pays you dividends
Gold however does not pay you in this way. When investing in gold, you hope that someone else will pay you more for it in the future. While it is certainly possible that gold will appreciate in value over time, this is entirely speculative.
Is Investing in Gold Good or Bad?
Gold is a bad investment. Let me rephrase. Gold is a bad investment for the majority of people. Not only is gold extremely speculative, it has underperformed all major US indexes.
You see, the price of gold has increased by just under 400% over the past 30 years. That may seem like a lot, but that’s only a 4.5% annualized return. Over the same period, the Dow Jones Industrial Average (DJIA) has gained over 1,000% which is 8.3% annualized.
Even more, owning physical gold comes with costs. There are a storage and security costs to owning gold. This will surely eat into any gains realized from your gold investment.
Finally, because gold is a physical asset, when it comes time to sell, the government is going to want a cut. This is called a capital gains tax. There may be ways around this tax, but it seems like you’ll at least be paying some type of income tax on your gains.
An Argument for Gold
Some smart investors will argue that gold is a good investment. Most often, they will predict that in the event of an economic collapse, gold will ensure their financial security. In other words, if some traumatic event renders currencies around the world worthless, physical gold will retain its value. They think this because, in general, as economic conditions worsen, the price of gold increases.
The problem with this scenario is that gold, like pretty much everything else, is valuable only because people perceive it to be valuable. In 2021, while most gold is used as a luxury for jewelry, only some gold is used in industry, and the rest sits dormant in investments.
If world currencies were to be devalued to a point where they are worthless, gold would probably not be useful at that time. More important assets in that situation would be practical items of survival such as food, water, and shelter. Realistically, gold would serve no real value in such an apocalyptic world.
Gold is NOT a good investment for most people. Stick with low cost ETFs and let the power of compounding work its magic.
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