Is Gold a Good Investment For Retirement?

Gold may be fun, but that doesn't make it a good investment.

Bar of Gold
Gold as an investment? Maybe not. YasuhideFumoto/DigitalVision/GettyImages

Many commercials on TV, radio ads, and gold brokers tout gold as a great investment. Is it? Gold pays no interest, no dividends, and realistically could go twenty years without going up in value. That doesn't sound like a spectacular investment, so why do so many people buy it? Let’s take a look at the factors that could make gold either a good or bad investment.

Historical Gold Prices

If you look at historical gold prices, you see that the price of gold shot up dramatically in the 2000’s and appears to have peaked in the summer of 2011.

Looking back, something similar happened in the late 70’s. After the price increase in the 70’s, gold spent the next twenty years declining in value.

After the recent dramatic increases in the price of gold, it is entirely possible it will once again languish for a considerable length of time. While it is languishing it is not producing interest or dividends. In retirement, you need an investment that either generates current income or is reasonably expected to appreciate in value so you can sell it in the future and use it for consumption purposes. Gold is not an investment that you can rely on for either of these purposes.

Gold as an Inflation Hedge

Many proponents of gold suggest it is a good hedge against rising prices. The facts do not support this statement. Gold is a better hedge against a crisis, rather than a hedge against inflation. In times of crisis, gold prices tend to rise. But that is not necessarily the case during periods of high inflation.

 Although people flock to gold in times of crisis, if a real crisis occurs, you are likely to wish you had invested in a chicken coup, a home garden, batteries, gasoline, and guns.

Because of the Great Recession of 2008/2009, many people are still concerned about a crisis. The result is people buy gold because it makes them feel better.

It functions as a mental security blanket.

Stock-Piling Gold

Doe gold bring security? If you stockpile gold somewhere safe, and a crisis occurs, how are you going to use your gold to purchase useful goods and services? Do you think people are going to start pulling out their kitchen scales, weighing gold and trading it for eggs and chickens? Perhaps. But if a real crisis occurs there are numerous things I’d rather have stockpiled other than gold; things like batteries, guns, solar panels, chickens, a garden, oil, and gasoline, just to name a few.

Gold for Speculation

The article Why Invest in Gold expresses the opinion that “Gold itself is speculative, and can have high peaks and low valleys. That makes it too risky for the average individual investor.” It also makes it pretty risky for the average retiree. Instead of speculating, most retirees ought to spend time on building an asset allocation plan designed for retirement.

Gold can be a good investment for speculative purposes. If you had the foresight in 2007 and 2008 to see a major financial crisis coming, you could have speculated and bought gold in anticipation that it would become popular in the face of a crisis. In such a situation instead of taking possession of actual gold bars or coins, you can buy a mutual fund that owns gold which allows you to buy and sell it with ease.

Of course, in hindsight, it is easy to see what you could have done. Recognizing these situations in advance is difficult to do, and it's usually random luck, not skill, that results in decent returns from the practice of speculation.

For the average retiree, if you have more than 2-3% of your assets allocated to gold, consider selling it off and reducing your exposure to this volatile asset class.

Gold for Fun

If you want to invest in gold as a hobby, go for it! Like any hobby, it might turn into something profitable, and if it doesn’t, you’ll have some fun and learn a lot along the way. Just remember, it is play money. That's completely different than the retirement money that needs to support you for the rest of your life.