We’ll skip the fancy charts and graphs for this post to convey in a concise manner why we think you should avoid getting bit by the Gold Bug, even as the metal’s price has increased materially so far in 2016.
Gold Produces No Income and Costs Money to Store
The yellow metal has no cash flow, forgoing any dividends or interest payment to investors. In turn, it makes it much more difficult to value, since there is no income stream to measure. What’s the best way to calculate a fair price then? It’s really what people are willing to pay – whether it happens to be $500 an ounce or $2,000 for the same quantity. Oftentimes, it’s herd mentality that creates momentum in either direction. Making things worse, there is a negative cost of carry because there are costs, such as storage and insurance, associated with gold ownership.
There Is Limited Practical Value
You can wear a gold necklace or get a gold crown for your tooth, but it generally lacks practical uses on a large scale. You certainly can’t eat or drink it, and its usage in industrial processes is very limited compared to metals such as copper.
From One Hole to Another
Because gold isn’t really used for practical purposes then, the vast majority that has ever been mined remains intact. On top of that, new inventory is constantly added from one hole in the ground, a mine, into another hole, a vault. By just being there in a physical form, and out of sight at all times, many investors wonder what the difference is between unmined and mined gold.
Gold and the Economy
Gold has historically been viewed as a hedge against inflation and a counter to weakness in the U.S. dollar. That’s fine and dandy, but it’s a difficult task to get a handle on inflation and currency fluctuations around the globe given the different determinants of each, including central bank decisions from Washington to Tokyo. With rates as low as they already are and the domestic economy improving, the dollar should be able to continue its multi-year trend higher.
The Tax Man Cometh
Even the IRS agrees that gold isn’t an investment. While one of the attractions of investing in the stock market is a relatively reasonable long-term capital gains rate limit of 20% (and that’s just for those in the 39.6% bracket), collectibles are taxed at 28% when held for over a year. What are some examples of collectibles? Artwork, wine, Beanie Babies, and you guessed it, gold.
There you have it – as tempting as investing in gold can be, these are some of the many reasons why we suggest investors keep the Gold Bug at bay.