5 Reasons Not to Own Gold, Refuted

In the wake of Thursday’s surprising Brexit vote, markets were rattled, oil prices were under heavy pressure, yet gold surged. 

But is it really shocking to learn about gold’s resurgence? The precious metal has long been thought of as a safe haven during a tumultuous market. That’s why we saw investors scramble to protect their investments, ultimately bolstering gold prices.

Still, I’m often confronted with the same arguments against gold ownership. Many are long-held conventions, while others simply seem to be the result of effective marketing.

All of them are arguable.

So I’ve chosen the top five most common arguments against gold ownership and decided to refute them with you here this weekend.

Let’s start…

1. Gold Has a Poor Long-Term Yield

Argument: Investing in gold has poor long-term returns compared to common stocks.

Refute: I hear and read this one all the time. But “long term” leaves a lot open to interpretation. If “long term” means 30 years, common stocks have outperformed the price of gold, and the conventional wisdom seems true. But if it means 45 years, the price of gold has outperformed common stocks. So it really depends on how you measure “long term.” But here’s what really kills this argument…

Most investors today are not looking to hold positions for the long term (by any measure) in their portfolio — other than in their retirement plans. The average holding period of a stock has fallen from about eight years in the 1960s to around five days today.

Gold’s long-term returns simply don’t matter to investors looking to play a short-term rally in prices — which is absolutely the majority.

2. Owning Gold Carries Significant Costs

Argument: Gold ownership carries significant costs including storage, transportation, and insurance.

Refute: It does… if you’re King Solomon. But there are very few individuals who really have enough gold that they actually need vault storage.

Organizations like banks, bullion wholesalers, and jewelry manufacturers often have a need to store large amounts of physical gold. And it is expensive for them. Vault storage for gold for these organizations typically has an annual cost of between 0.5% and 1.0% of the bullion’s value.

But let’s be fair… you’re not J.P. Morgan or Tiffany’s. So while it would cost someone like King Solomon big bucks, the cost of storing gold for most investors is nil. The same is true about transportation.

Vault storage for gold is available to retail customers. And this is really where I would guess the fodder about the costs of gold ownership is generated. Vault storage has essentially become an upsell product for some bullion dealers. The pitch is essentially that your gold will be held in a super-secure vault facility and be completely insured against theft.

I’ve never paid anyone to store my gold for me in the past. So I really don’t know all of the costs. But from what I gather, the minimum you would pay for gold vault storage is over $50 a year. The smallest safety deposit boxes at your local bank can likely hold over 100 ounces of gold and probably cost about $25 or $30 a year.

Of course, you don’t get the benefit of having insurance with a safety deposit box. But it really is quite unlikely that a bank robber is going to break into safety deposit boxes. I’m not saying it has never happened. But the odds are highly unlikely.

And when you pay one of these vault storage companies to hold your gold, you open yourself up to the chances of multiple different hidden charges and fees. I don’t mean to pick on this one particular company, but just check out the extent of one gold storage company’s standard charges.

So at the end of the day, while gold ownership can carry a significant cost for extremely large holders, the cost of gold ownership for most investors is nil.

3. Large Stockpiles Sit Ready for Potential Resale

Argument: Nearly all of the gold that has ever been mined is still available for potential resale — and that inventory is always increasing.

Refute: Gold is actually a lot rarer than most people think. Estimates suggest that there are roughly 6.4 billion ounces of aboveground gold in the world. And while that may seem like quite a lot, consider that there are also 7.4 billion people on the planet. That means less than one ounce of gold exists per person.

And yes, new mine supply adds to the aboveground gold inventory every year — but only by less than 20 million ounces. There are over 130 million people born every year. So even though there are stockpiles and hoards of gold sitting in banks all over the world, the metal is actually quite rare relative to its consumers.

What’s more, all the aboveground gold actually isn’t in banks. In fact, most of it’s not…

About 60% of all the world gold demand comes directly from the jewelry industry. This means most of the world’s gold is not actually sitting in bank vaults. Rather, most of the world’s gold is tied up in Mr. T’s necklaces and your parents’ wedding bands. But jewelry lacks standard weights, finenesses, and security that makes investment-grade gold bullion marketable. And melting jewelry down to mint the metal into a form of investment-grade gold bullion comes at substantial cost and time.

4. Gold Has Little Utility

Argument: Gold is a worthless asset with no real usefulness.

Refute: This is one of the most well known and quoted of the conventional arguments against gold, made famous by Warren Buffett, who said in 1998:

(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

But gold actually has more utility than most other assets classes. It is true that only about 8% of the world’s gold goes into technologies and industrial applications. But that doesn’t mean gold isn’t useful in the arenas. The fact is, gold could be incredibly useful.

• Gold has incredible electrical conductivity and resistance to oxidation and corrosion, making it a great metal for electrical connectors.
• The metal’s catalytic properties can be effective in reducing hazardous emissions to the air and removing industrial pollutants from groundwater.
• Exceptionally malleable and ductile, gold can be manufactured so thin that it appears transparent and can be used as a reflector of electromagnetic radiation, radio waves, and heat.
• The metal’s biocompatibility makes it a natural choice for sensitive human implants.
• Gold-based drugs have been developed and are used to treat illnesses. Research is currently ongoing into the role that gold nanoparticles can play in cancer treatment.

Believe me, this list can go on and on. The reason less than 10% of gold supply goes into technology and industrial applications is simple: gold is too valuable to be used in a lot of industrial applications.

If for whatever reason gold never became a monetary metal and was as cheap as silver, it would be used in technologies and industrial applications on a wide scale.

But gold is a monetary metal. It can be used as a store of wealth and currency. There is little else that has such an extensive potential for technological and industrial applications and acts as a monetary asset at the same time. So gold actually has more utility than most other assets classes.

Gold Doesn’t Produce Income

Argument: Gold doesn’t pay a dividend.

Refute: This is another of the famous arguments against gold ownership… and another espoused by Buffett that’s not technically true. Some gold owners actually do earn interest on their gold. Large companies operating in the wholesale market (such as bullion bankers, mining companies, and jewelry producers) will often loan and borrow gold from each other with interest.

Borrowing gold might sound a bit odd. But wholesale gold entities borrow gold for the same reasons anyone borrows anything: borrowing reduces the risks of ownership, and/or they need/want the metal immediately and are willing to pay a high premium for it.

For instance, an end-use manufacturer such as a jewelry maker may want to borrow gold instead of fully commit to own it at a fixed price. This can give a jewelry maker leverage in setting up contract pricing for a particular product.

And much in the same way individuals borrow dollars, pay interest, and then return dollars to the lender, wholesale gold entities will often borrow gold, pay a borrowing cost, and return the gold to the lender or pay a contracted price for the bullion. So some gold does pay an interest.

But similar to storage costs, that form of income from gold doesn’t matter to most investors. And I can’t refute that gold doesn’t reproduce or pay out any kind of dividend at all. But here’s what’s really special about gold…

Gold can’t go into debt, and it’s never a liability.

I’d like to present a new reason not to own gold that I have yet to see stated anywhere else. And this is really the main reason you should not own gold (or any other investment, for that matter). That’s simply this…

The #1 reason you should not own gold or gold stocks is if you believe in higher returns from another asset.

It’s that simple.

Personally, I don’t see another major industry outperforming precious metals over the next several months. So I own precious metal assets.

Until next time,

Luke Burgess
Energy and Capital