Investments in Gold – Chapter 3: Disadvantages of investing in Gold

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Updated: Mar 5, 2019, 13:14 GMT+00:00

This is chapter number 3 out of 15. Read the rest: Read Investments in Gold – Chapter 1: Introduction Read Investments in Gold – Chapter 2: Advantages of

Investments in Gold – Chapter 3: Disadvantages of investing in Gold

This is chapter number 3 out of 15. Read the rest:

Read Investments in Gold – Chapter 1: Introduction
Read Investments in Gold – Chapter 2: Advantages of investing in Gold

Throughout history the value of gold has shown to be unstable. Although its value has been increasing lately, it declined by 70% during the 1980s and 1990s.

While the value of equities and real estate might be increasing, the value of gold might be declining on the other hand.

This is due to the fact that investors will switch their investments towards other markets rather than investment in gold.

Since June 2008, the value of gold has reached over $980 per ounce, an all time high.

Although such gain can be seen to be a favorable trend, it can also mean that the gold’s market is oversaturated and is due for a market correction any time soon.

As compared to other precious metals, gold has a low industrial demand. Its demand and value is thus decided largely by investors and is comparatively less stable.

Even if in the short run, gold is an excellent storehouse of wealth, as a long term investment, gold is the not ideal investment. This is because its return is easily outpaced by the equities market.

The Wall Street Journal has shown that $1 of investment in gold in 1969 returned $20 in 2006 whereas the same investment in the equities market (according to the S&P 500 index) would had generated a return twice that amount.

Investments in gold have no payout in terms of dividends. On the contrary, stocks have dividends paid regularly by the company whose stocks the investors holds.

Dividends are a portion of a company’s profit paid out to its shareholders.

The value of gold has been outpaced by inflation.

With the exception of the last three years, the value of gold has been on the decline after reaching a high in 1980.

The demand and supply of gold has a large market disparity. This is due to the fact that most central banks have a large stockpile of gold bullions amounting to thousands of tons. The World Gold Council in 2003 reported that there are 33,000 metric tons of gold kept in the vaults of central banks. This amount accounted for almost 25% of all gold which had been mined by mankind. Furthermore at the same time in 2003, the production and supply of gold to the market was only 3200 metric tons. Mathematically speaking, this would mean that the gold in vaults of the central banks alone can supply the gold market for a decade without any mining at all. With that kind of disparity, central banks can easily distort and depress the prices in the gold market if they choose to release their stockpiles into the open market.

Gold mutual funds with the exception of the last three years have also performed poorly when compared to mutual funds that invested in non mining related equities. As such the best way to partake in the investments of the precious metals market is by purchasing the actual metal itself whether in the form of bullions or coins.