Hopefully, at some point you will cross the threshold into a positive net worth. At that point you will own more than you owe. It is a happy moment. But it can also be stressful.
This is the point when most people realize that even though they have some money … they have absolutely no idea what to do with it.
It is totally understandable to be overwhelmed with choice. You can stash your money away in checking, savings, CDs, money market accounts, stocks, bonds, mutual funds, ETFs, real estate, collectibles, precious metals, etc, etc, etc.
Plus, that doesn’t even cover what kind of account to use: non-retirement, traditional IRA, Roth IRA, 401(k), 403(b), cash-value life insurance, or a coffee can buried in the back yard!
I answer all of those questions in Part 3 of my book, Practically Independent: Practical Advice to become Financially Independent.
But, for today, I want to revisit one specific topic when it comes to investing: Is gold a good investment?
In my opinion, not only is gold not a good investment, it is actually not an investment at all.
In order for me to consider something an investment it needs to meet all three of these criteria: pays you for owning it, creates value, and predictably responds to market conditions.
Gold is not a good investment because it fails to meet two of the three criteria for good investments. Gold doesn’t pay you for owning it and it doesn’t create value.
Criteria to be Considered an Investment
The best way to understand my investing philosophy is to examine the way I look at money.
Money is a resource. Just like every other resource it is useful and therefore it has value.
When you own a resource you can use it yourself or you can sell or rent it to others in exchange for compensation. For example, land is also a resource, and if you own land you can let others use it for a period of time (rent) or you can sell it. Either way, you get compensated for temporarily or permanently transferring the rights to use the resource to someone else.
The same is true of money. When you own money you have the opportunity to get paid for letting others use that resource. You can let other people use that money (temporarily), in exchange for compensation.
However, you can also do a lot of other things with money that do not pay. You can buy food, housing, vacations, etc, etc, etc! Of course, there is absolutely nothing wrong with any of those things, but the difference is that those are not investments.
So, what turns a purchase into an investment? I use three criteria:
- Pays you for owning it
- Creates value
- Predictably responds to market conditions
An Investment Pays you for Owning It
My first criteria for determining whether something is an investment is whether it pays you for owning it. Things you can buy that do not pay you for owning them are not investments.
When you buy a stock you become a part owner of a company. As a result, you become entitled to a portion of the profit that company produces. When a company distributes those profits to the stock-owners, that is called a Dividend.
When you buy a bond, you are lending a company money for a specific period of time at a specific interest rate.
Stocks and bonds pay you for owning them.
When you buy gold, you get a hunk of metal. Gold does not pay dividends. Gold does not pay you for owning it.
An Investment Creates Value
My second criteria for determining whether something is an investment is whether it is actively working to create value. Things that simply have intrinsic value but don’t create new value are not investments.
By buying stocks or bonds you are investing in companies that create value. At every publicly-traded company on the planet, hundreds or thousands of people get up every day and go to work trying to create products and services that can be sold in the marketplace and create profit.
Those profits are either reinvested in the business or paid out to the owners or lenders. If you own stock, you are an owner. If you own bonds, you are a lender.
When you buy gold, you get a hunk of metal. No one wakes up in the morning and tries to find ways to turn your gold into goods and services that have value in the marketplace. Gold does not create value.
An Investment Predictably Responds to Market Conditions
My third criteria for determining whether something is an investment is whether it responds to market conditions in a predictable way.
Gold actually passes this test.
When economies are growing and the geopolitical climate is stable, stocks tend to do well. When economies are in recession and tensions are high across the globe, investors tend to retreat to safety. This puts downward pressure on some stocks and upward pressure on some bonds and precious metals.
Precious metals are seen as safe-havens and generally increase in price during unsettled economic times. When economies are stable and growing, precious metals generally under-perform. Therefore, precious metals generally react predictably to market conditions.
When you buy gold, you get a hunk of metal. Hunks of metal are generally seen as safer than other types of investments, so their movements are relatively predictable based on macro-level economic trends. Gold generally responds predictably to market conditions.
Bonus Criteria: An Investment is Passive
Just for fun, I will throw in a fourth criteria that I use for my personal investments. I like investments that are passive. However, this is just a personal preference and I fully recognize that non-passive investments like Real Estate are totally valid.
For me, the purpose of investing is to get paid for having money. That means that the primary (or only) value that I bring to the transaction is cash. Investing in Real Estate is different. A Real Estate investor isn’t letting someone use their money in exchange for compensation. They are letting someone use real, physical space in exchange for compensation.
As a result, Real Estate investing requires contracts, meetings, negotiations, attorneys, managers, plumbers, etc, etc, etc. In my opinion that turns Real Estate more into a side-hustle or job than an investment.
So, I don’t invest in Real Estate, but that is more of a personal preference than a principle. I know that many people have created huge wealth by investing in Real Estate, and I think that’s awesome. I’m just not an expert in Real Estate, so I don’t have any advice on how to be a successful Real Estate investor.
Also, it is possible to be a passive Real Estate investor by using RIETs: Real Estate Investment Trusts. A REIT is like a mutual fund, but for Real Estate.
Back to gold: When you buy gold, you get a hunk of metal. I can’t think of any investment that is more passive than a hunk of metal. So, gold passes the Passive Test. Yay!
Gold and Other Precious Metals are Not an Investment
In order for me to consider something an investment it has to meet all three criteria. It has to pay me, it has to create value, and it has to be relatively predictable.
Gold does not meet the first two criteria, so it has no place in my portfolio. The same is true of all precious metals.
Making the jump into positive net worth is equal parts exciting and scary. There are too many options for how to deploy your resources. And, it can be really hard to tell the difference between real advice and a sales pitch.
That’s why I have three criteria for investing that help me eliminate all of the noise. If a potential investment does not meet all three criteria, I can just ignore it and move on.
Of course, there is more to my investing approach than just avoiding precious metals. I also avoid individual stocks and bonds, crypto-currency, and commodities. If you want to know more about what I actually do invest in, check out my article on how to use diversification to profit from all market conditions. And, you can check out my article on why investing in the S&P 500 is a bet on America.
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.