Myth One: Gold Is A Bad Investment

Everyone seems to have a story about how someone they know bought gold at $850 per ounce in 1980 and had to wait 28 years to break even. If inflation is taken into account, the gold price would need to reach $2,200 for that to occur. While this may have happened to the few unfortunate people who bought at the top of a short‑term spike, it also applies to most investments. If you buy any investment at a cyclical peak, you will have to wait a long time to break even.

Closer examination shows that gold only surpassed $800 per ounce on two days in 1980. And the peak monthly average high was considerably lower, at $675 in January 1980. It’s hard to imagine that many people actually bought gold on the one day that it was $850 in 1980. The average annual high was $613 in 1980. One year earlier, in 1979, the average price was $306 and in 1978 it was $193. For the many investors who bought gold ahead of the short‑term peak, the price held up fairly well throughout the entire bear market.

Myth Two: Gold Is Not A Good Inflation Hedge

There are a number of arguments against gold as an inflation hedge. Usually these arguments select their time frame from the price spike in 1980. While gold did not keep up to inflation using daily prices from 1980 to 2002, the annual average gold price has outperformed inflation as measured by the Consumer Price Index since 1971, when the gold price was no longer fixed.

Myth Three: Gold Is A Risky Investment

In order to adequately analyze risk we need to understand what risk means. There are numerous types of risk that may apply to some investments and not others. 

Liquidity risk is associated with the market on which the investment trades. An investment that can be sold quickly without price concession is considered liquid. Financial assets often contain multiple risks – liquidity, currency, default, interest rate and market risk. None of these risks apply to gold.

International risk can include both political risk and currency risk. Investors can avoid international risk, as gold is portable.

Default risk and credit rating risk are associated with debt instruments. Clearly, when a bond or a mortgage defaults, the investor will suffer losses. 

The investor may also suffer losses if a debt instrument’s credit rating is downgraded. Gold bullion is not someone else’s liability.

Interest rate risk affects most asset classes. While changes in interest rates have a direct impact on debt instruments, they also have an indirect impact on stocks, real estate, commodities and precious metals.

Initially, precious metals, commodities and real estate tend to increase in value due to inflation. However, if real returns become sufficiently high, demand for gold may decline while demand for bonds increases. During a period of low interest rates, it is better to hold bullion, as bond returns become negative after accounting for inflation.

Purchasing power risk is essentially inflation risk. It impacts all asset classes, which is why returns and investment performance should always be measured in real terms rather than just nominal terms. Gold maintains its purchasing power during inflation and deflation.

Market risk is exposure to fluctuations in the aggregate market. All asset classes are subject to market risk in varying degrees. Proper diversification using at least six asset classes with varying degrees of correlation can minimize overall market risk.

As stocks and bonds have been correlated since 1969, portfolios consisting of only three financial asset classes are subject to much higher market risk than a portfolio that includes other asset classes such as real estate, commodities and precious metals.

Systemic risk encompasses several factors such as market risk, economic risk, inflation risk, default and international risk. Systemic risk can also include terrorist attacks, war, oil supply disruptions, a major stock market crash, and the collapse of a major financial institution or a breakdown of the banking system. 

Systemic risk is not diversifiable and will affect all asset classes including precious metals. However, once any initial liquidation takes place, precious metals tend to outperform all other asset classes as investors seek refuge in the traditional safe haven of bullion.  

Myth Four: Gold Does Not Pay Interest Or Dividends

This reasoning has often been used to denigrate the benefits of holding bullion. In fact, the Bank of England cited this argument as justification for selling half the country’s gold holdings at the bottom of the market in 1998. 

Gold, like currency or any other asset that sits in a vault, will not earn interest or dividends. But equally, it will not be at risk. No asset class generates income unless you give up possession of your money and take the risk of not getting it back. As we have recently seen in the US and the UK, bank deposits are not as safe as commonly believed.

Myth Five: Gold Is An Archaic Relic

Gold is often referred to as an archaic relic with no monetary role in today’s modern digital society. However, a number of facts contradict this argument. Central banks still hold 30,190 tons of gold in their currency reserves.

Myth Six: Mining Stocks Are A Better Investment Than Bullion

While mining stocks can generate impressive returns during an uptrend in precious metals prices, they do not always outperform bullion. Junior mining companies are subject to numerous risks even though some may do exceptionally well. Some, however, become worthless.

Mining stocks tend to correlate to equity markets during sharp declines even if the price rises. As these myths are dispelled and the price of bullion rises,astute investors will benefit from their foresight in purchasing bullion at its current undervalued cost before the public at large becomes fully aware of the benefits and bids up the price.

When you consider that total global financial assets are estimated at over $145 trillion, but total global above ground gold, including art, religious artifacts and jewelry is a modest $5.7 trillion a massive wealth transfer event is very likely to occur. Even a 10 per cent reallocation to gold could result in a 1,200 per cent increase in the price.