3 key reasons why I will NOT invest in Gold

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Financial Horse was started to demystify money’s mysteries. He is a firm believer of, “if you can’t explain it to a 6-year-old, you do not understand it yourself”. Financial Horse is updated weekly with commentary on financial markets.

I recently came into possession of a solid gold bar (it’s a long story). With the personal interest on the line, I figured this was a time to take a look at the attractiveness of gold as a long term investment.

Basics: Gold as an Investment

Gold needs no introduction. Since the start of mankind, humans have been drawn to this shiny metal. In 3000 BC, it was used by the ancient Egyptians to make jewellery. In 560 BC, it started to be used as a form of currency, and this continued all the way until the 19thcentury, when the US government pegged the US dollar to gold (the gold standard). The gold standard was only recently abolished in 1971, but the concept of gold as a store of value persists.

There are many ways to buy gold, including physical gold, gold ETFs (GLD and IAU), gold savings accounts, gold certificates, gold futures etc. Unless you really know what you’re doing, it’s generally best to stick to either physical gold or gold ETFs.

When you value a company, you can apply valuation metrics such as P/E ratios, EV/EBIDTA, discounted cash flow etc. None of these apply to gold. Much like any other commodity (or cryptocurrency), gold’s price is determined purely by demand and supply. The uses of gold are set out below, and it’s used primarily for jewelry (50%), followed by gold bars/coins (25%), and electronics (9%).

Chart source: Statista

1. Long term returns of gold

The problem when analysing the returns of gold, is that because the spot price of gold is denominated in USD, any long term chart of gold’s price will also reflect the strength of the USD, and the strength of the US economy. I’ve inserted a chart of the 100 year real returns of gold below, and it’s pretty impossible to get any good insights from this.

Because of this, I felt that the best comparison was to plot the returns of gold against a USD based stock index. I used the Wilshere Large Cap Index, and you can take a look at the results below (assuming all returns are reinvested).


  1. On a 10 year time frame, the stock market absolutely destroyed the returns from gold
  2. On a 20 year time frame, the returns from gold and the stock market are actually pretty similar.
  3. On a 30 year time frame, and any period of time from 30 year onwards, gold just never ever comes close to competing with the stock market.

Legend: Black is the Wilshere Large Cap Index, Yellow is gold


There are many ways to interpret this set of data, and no one will ever be able to know for certain which is correct, but here is my personal take:

  1. Gold does well when Shit Hits the Fan (SHTF) – And when I mean SHTF, I don’t mean a plain vanilla recession. When you take a look at the 100 year chart of gold, it’s clear the gold price just breezed through countless recessions like they weren’t even there. The 2 big spikes in gold price came in the 1970s, which was a period of rampant inflation (it was 14% in 1980), and in 2010 following the near collapse of the financial system due to the sub-prime crisis. In other words, gold is completely useless about 90% of the time. But the 10% of the time when something really bad happens to the global economy, gold price usually always shoots through the roof. We saw this in the 1970s, and we saw this in 2008. It’s exactly why the zombie apocalypse guys always have a gold bar stashed away in their survival pack.


  1. Over long periods of time, gold is a horrible investment – The problem with gold, is that gold just doesn’t do anything. When you invest in real estate, you can rent it out to generate income. When you invest in a stocks, the company uses that money to reinvest in its business, and the value of the business you own increases. When you invest in gold however, the gold just sits there. Forever. Until you decide to sell it. Which is why over extended periods of time, an investment in gold just cannot keep up with stocks or real estate. If you compare the returns of gold against the stock market for any period of time from 30 years onwards, gold just never comes close.

When you invest in stocks or real estate, you are owning income producing capital, and you are betting on the ingenuity of humans to continually increase production. When you invest in gold, you are betting against humanity, and you are betting that some apocalyptic event will happen that will disrupt day to day life as we know it. I don’t know about you, but I’ll bet on humanity any day.

2. Gold as a portfolio diversifier

There are many famous investors out there that include gold in their portfolio as a diversifier. In fact, Ray Dalio’s all weather portfolio has an important gold component, and he has this to say about gold:

“Gold is a very underowned asset, even though gold has become much more popular. If you ask any central bank, any sovereign wealth fund, any individual what percentage of their portfolio is in gold in relationship to financial assets, you’ll find it to be a very small percentage. It’s an imprudently small percentage, particularly at a time when we’re losing a currency regime.”

In fact, StashAway allocates a small percentage of their assets to gold, so those of you who invest in StashAway are also investing in gold.

The problem with this argument, is that just about anything can serve as a portfolio diversifier. I can allocate 5% of my net worth to copper, oil, 4D or cryptocurrency, can call it a portfolio diversifier, but does’t make it a good investment. An asset class is a good portfolio diversifier if it displays good correlations with other asset classes or against economic trends. For example, if I have an Investment X that always goes up when stocks decline, that is a fantastic portfolio diversifier because an investment in X will allow me to smooth out declines in my portfolio (this is why people buy bonds).

Inflation Hedge

The most commonly cited argument, is that gold in your portfolio serves as an inflation hedge. The argument is that because the supply of gold is not linked to any central bank’s whim and fancies, it will retain it’s value even if there is rampant inflation.

But no matter how much we want to believe in something, if it cannot be substantiated by hard evidence, it just isn’t true. The chart below shows the gold price plotted against the inflation rate. If gold were an effective hedge, it’s price should go up when inflation goes up, but that’s just not what the data shows. Gold’s price seems to trade in its own world, irrespective of inflation. There is a paper here that goes into excessive detail over whether gold serves as an inflation hedge, but spoilers alert, their conclusion is that they couldn’t establish a clear relationship between the price of gold and inflation.

Gold smooths out losses in a recession

The other argument, is that gold does well when stocks are falling, and can smooth out losses in a stock portfolio. But if we look at the 100 year inflation adjusted chart of the gold price (the grey shaded areas are recessions), it’s clear that gold’s price barely even notices a recession, unless it’s a big one like the 1970s or 2008.

Hedges currency risk and political risk

The next argument, and one that I absolutely concede (it’s actually also what Ray Dalio alludes to in his quote above), is that gold is a fantastic hedge against currency and political risk. If you are a citizen in Venezuela facing hyperinflation (current estimates are at 100,000%), your paper money is essentially worthless. If you are a Turkish citizen and the Turkish Lira is tumbling, you’re getting exposed to massive forex risk. If you’re an Argentinean citizen and your interest rate is 60% (no kidding they just hiked it), you’ll be pretty worried about the value of your Peso sitting in the bank.

In all these situations, gold is a fantastic hedge against the currency and political risk. Because gold is universally accepted, it doesn’t matter how much the Turkish Lira or Argentinean Peso falls, if you can escape to US, you can still convert the gold bar into its worth in USD, and you can start a new life there. In fact, this is the exact reason why central banks need to stock up on gold, because it provides that kind of safety buffer in case there is ever a run on their domestic currency.

Unfortunately, these are very specific reasons to own gold. We live in Singapore, where the risk of a massive depreciation of the SGD is a remote risk(I hope). The risk of our government running the country into the ground is also not high (I hope). Holding onto large amounts of gold for extended periods of time is just a horrible investment.

3. Cost of ownership

The other problem with gold, is that because gold has to be stored in a vault somewhere, the storage costs are actually not something to be ignored. The expense ratio of GLD, one of the largest gold ETFs, is 0.40%. If you open a gold savings account with UOB, you’re looking at an annual fee of the higher of 0.12 grams of gold, or 0.25% p.a.

That’s okay when you’re investing in a S&P500 where the underlying investments pay a dividend that offsets the expense ratio. When you’re investing in a commodity like gold, that expense ratio is something you’re never going to get back, until you eventually sell the gold. In other words, you’re basically losing money every year on a gold investment, unless the price of gold goes up. And as we’ve seen from history, that’s definitely not something to be taken for granted.

Honourable Mention: Unscrupulous Activities

Gold does has one saving grace. It has universal value, and it is completely fungible. If you melt it down, there is literally no way to identify where the gold came from. These are very attractive properties for the less morally inclined among us. It’s why when famous criminals like Pablo Escobar or a mafia boss is arrested, they’re always found to be in the possession of a healthy stash of gold. Heck, even Najib was arrested with a ton of gold in his house. If you’re a big time criminal and you don’t have a ton of gold lying around, you’re probably not doing it right.

Closing thoughts

Warren Buffet hates gold. At the 2018 Berkshire Hathaway AGM, he asked audiences to pick between an investment in gold and the S&P500 in 1942. After asking the audience to guess, Buffett revealed that $10,000 invested in an S&P 500 index fund in 1942 would be worth $51 million today. However, $10,000 invested in gold would be approximately $400,000.

To me, gold is no different from any other commodity, like oil, platinum or copper. If you get the timing right and buy a huge chunk before prices go up, you can make a ton of money. But from a long term, multi decade perspective, you’re almost guaranteed to lose money on gold unless all hell breaks loose in the global economy. And that’s simply because gold is not an income generating asset. I feel like a true blue capitalist saying this, but in investing, the key is to always own capital, to own assets that can be used to generate income. Gold isn’t any of that. Much like cash, gold is a store of value, and by itself it doesn’t do anything unless you sell it and use it to buy a machine, to buy land, to buy a company.

I’m giving Gold a 2 Financial Horse rating because I recognise that there is a use for gold, if you want to hedge against political or currency related risks (or a zombie apocalyse). Gold had value 2000 years ago, and I think chances are good it will still have value 2000 years from now. Can you say the same about the DBS share or CapitaLand REIT we are investing in?

So this leaves me in a connundrum. What do I do with my solid gold bar? I could sell it all and convert into shares, but gold price is at a low now, and stocks are at a high, so that seems like a dumb move. I could wait for the next epic SHTF moment in the global economy, and sell it all to buy stocks, but who knows when the next SHTF moment will be. There was a 30 year gap between the the 1980s gold peak and the 2010 gold peak, if the next one takes another 30 years, I am going to be an old man by then. So I don’t have any ready answers to this question, and if any reader has a good suggestion, don’t hesitate to leave a comment below!


Financial Horse Rating – Gold


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