A warning about Investing in Gold...

What's up you guys? It's Graham here! So here's a question that I get pretty frequently: "Graham, what do you think of gold? Should I invest in gold? How much gold should I have?"

And honestly, unless you're talking about Runescape, my answer is pretty much always the same: Gold is not an investment. I mean, sure, it's fine to buy gold if it's a part of a watch or maybe a piece of jewelry, but as an investment, the answer is no, no, no, no, no, no, no, no, no. Gold is one of the worst investments out there, and I'll explain why. Gold is not the golden opportunity people think it is, and why this investment won't really pan out for many people.

And if you like these golden puns, make sure to hit the like button! This video is also coming from someone who was really interested in coin collecting as a kid. I had a lot of old gold American coins and old silver coins, and even saved up like over a year of birthdays and Christmas money to buy a proof platinum American Eagle coin.

So it's not like I don't have an appreciation for precious metals or coin collecting or anything of the sort. But is this actually a good investment, or is all that glitters not gold? Bet you didn't see that one coming.

Now, to get some perspective on this, it is very important to understand why gold is valuable in the first place and how it became what it is today. But also, if you want to skip past the history lesson and just go straight to the investment aspect of it—even though the history of this is actually super interesting and I spent a lot of time researching it—that's fine if you want to skip past all of this.

So they spent so much time doing... I'll put a little timestamp here so you can just go straight to that and then get right to it.

Now, if you chose to stick around, thank you very much! I really appreciate it. But gold has been around for quite some time. Even as far back as 40,000 BC, gold flakes were found in Paleolithic caves.

But you're probably asking yourself right now, "Wait a second, Graham! There are eight other noble metals out there! Why gold?" That's a great question! Let me answer that for you.

See, there are other metals that have been used in jewelry and coins and a lot of other things that we use today. So just platin, palladium, rhodium, iridium, obsidium, ruthenium—I might be saying one of those wrong—and of course, our good ol' gold and silver.

However, the problem with other metals is that they're extremely rare. So in order to use them in any large form, we're either gonna have to mine a lot of it, which isn't really possible, or the coins themselves would have to be really, really small. They're also very difficult to extract from the earth, and they have very high melting points, which doesn't really bode well for creating a currency.

So that leaves us with gold and silver. But silver tarnishes, which leaves us with pretty much gold as the perfect metal to use. Unlike other metals, gold doesn't rust, it doesn't degrade, it doesn't tarnish, it's heavy, it's aesthetically pleasing to the eye, and it's moldable. Gold at least has those elements that could give us a perceived value of trade or wealth.

And you could also couple that with the fact that gold is somewhat rare, and that all the gold in the world would fit in a twenty meter cube. So from there, civilizations not only use gold for its visual and trade appeal, but they also use it in jewelry and for royalty.

So now we're gonna skip past the next few thousand years, because not much happened there. We're gonna go to the year 1798, when an act established a fixed price for gold in terms of US dollars that basically valued one part gold to fifteen parts silver. Essentially, gold was used for large denominations, and silver was used for smaller denominations.

Now, this practice continued, but in the mid-1800s, other countries wanted to standardize transactions in a booming world trade market. This is when the gold standard was really adopted. It basically guaranteed that the United States would redeem any amount of paper money for its equivalent value in gold.

This meant that trade no longer had to be done with heavy gold bullion or coins, and that paper money actually increased the trust from one company to another, knowing that that was actually backed by physical gold. Paper money basically had something that it was tangibly tied to that gave it value—gold.

But then something tragic happened in the 1920s, which obviously is the Great Depression, and this greatly affected the price of gold. The market suddenly tanked; people panicked and started trading in all of their paper currency and redeeming that value in physical gold.

Now, the problem for this was that the demand for gold was skyrocketing and people were draining the banks' reserves of gold. Certain banks were actually running out of gold; they didn’t have enough to get back to the people. Now, when this happened, the banks were then forced to turn in the rest of the gold they had into the Federal Reserve for safekeeping.

Laws were then passed that actually made it illegal for any private citizen to hoard gold, and that law mandated that people turn in any gold that they had in exchange for paper currency. Now, at this point, the United States had the largest supply of gold reserves in the world. As a result of this, other companies began pricing their own currency to the value of a dollar rather than the value of gold.

However, by 1970, the United States budget was ruined by the Vietnam War, and demand for gold increased beyond what any reasonable currency could sustain. This is what led to the exit of the gold standard in the 1970s. This is also why you see most gold charts beginning in this time, around 1970 to 1972.

Prior to then, the price of gold was relatively flat, pretty much fixed at a price of $35 per ounce. So after this, it really became the golden era of gold. They need those Miami Vice glasses! Like, it became the golden era of gold.

Immediately after exiting the gold standard, the demand for gold just skyrocketed, going from $35 an ounce in 1972 to $594.90 in 1980, which works out to be $1,924 in today's money adjusted for inflation. Basically, the government ended up doing some shifty stuff here and raised money by allowing people to buy back gold at newer higher market prices, and then profiting from the difference.

But since then, prices and demand have dwindled. People didn't really see it as the golden opportunity they thought it was, and by 1997, it was trading for only $287 an ounce. It then later spiked to almost $2,000 an ounce in 2011, just as everything else was plunging in value. And right now, gold is hovering at about $1,200 an ounce.

But how does this actually look from an investment standpoint? And is this even an investment to begin with? Since gold was a fairly fixed price prior to 1970, we can really only look back at the last 45 years or so of data adjusted for inflation to really determine its value.

If we take the price in 1978, gold was trading for $208 an ounce. We can reasonably determine that with inflation, that would be worth $838 in today's money. And as we all know, gold today is about $1,200 per ounce. This means that gold has gone up in value adjusted for inflation by 45%.

Get this: Over the last 40 years, you know just as a comparison here, the S&P 500 index went up in value 630% over that same time period, adjusted for inflation. So given that over the last 40 years, gold has only gone up on average 1% annually adjusted for inflation—1% again versus the S&P 500, which went up in value five times more during that same period, also adjusted for inflation.

So why do people even think that gold is an investment or even worse, a hedge against inflation? Remember that this is a metal or investment, as some people call it, that went down in value 80% from the year 1980 to 2001, over 20 years, before slowly creeping back up in price.

Now, when you're looking at any sort of investment, we have to look at the factual data to determine whether or not you can actually make money in something. And historically speaking, gold is really factually one of the worst investments out there.

Owning physical gold has so many disadvantages to it. The first one is that when you actually go and buy physical gold, the large spread between the bid and ask price ensures that you are immediately underwater on your so-called investment as soon as you actually buy it.

Then you also have the shipping cost for a very heavy metal that you have to include in your cost basis for owning the gold. But then, once FedEx delivers your terrible investment to your doorstep, you’re gonna have to figure out how you’re gonna actually store it.

If you end up keeping your terrible gold investment at your house for safekeeping, you expose it to the risk of theft, damage, fire, natural disaster, and anything else that could happen to that physical gold that you have. Or if you decide, "I'm gonna take my terrible investment to a bank," well then guess what? You have to pay for a safety deposit box to store it.

Or other companies will gladly charge you to hold your gold for you. But let's be real here—why would you ever give someone else your gold when the entire purpose of it is for you to hold on to it yourself?

Another important distinction of gold is that it doesn't throw off cash, much like a stock's ability to produce income for the shareholder. It doesn't give you any interest either; it just kind of sits there looking pretty.

So why do people ever consider this an investment or a hedge against inflation? And the reality is that it's neither! In fact, the real purpose of gold is a hedge against fear. The more people fear about inflation, economic collapse, or defaults, the higher the price the gold goes.

The thought process here is that while paper currency can't be trusted, gold will actually retain its value. Now I’m sure all of the doomsdayers out there who are promoting fear would also say that our paper currency right now is really backed by the faith of our US government.

But doesn’t this really also remind you of the cryptocurrency? Rana for people were also saying that our paper value is worthless because we only give it the value because our government says it's valuable.

But let's be real here; the U.S. treasury security has never once defaulted on any sort of currency in our entire lifetimes. And if this were to hypothetically happen, the entire global financial system would be collapsing, and the value of gold wouldn't really do much anyway.

If anything, the value of probably rice and beans and canned food and water would be way more valuable than the price of a gold coin. So for the way I see that, that entire argument just doesn't really make any sense.

So anyway, the moral of the story here is that the prices of gold are usually tied to our fear of economic collapse, whether or not it's actually warranted. After its peak in 2011, which was the best time to buy pretty much anything else in the markets, gold was at its very highest point and has seen a slow decline since then.

And this brings us to Warren Buffett's golden rule: Be greedy when others are fearful, and all the fearful people in 2011 were buying gold.

So with that said, you guys, thank you so much for watching! I really hope you guys enjoyed this video. If you do, make sure to smash the like button on this; it really does help out a lot.

So let me know in the comments section below if you guys enjoy videos like this, if you want to see more like this, and any other video suggestions that you have for this channel—let me know down below!

Also, make sure to subscribe, and feel free to add me on Snapchat and Instagram. I post there pretty much daily, so if you want to be a part of it there, feel free to add me there. And then finally, I have a private Facebook group in the description for anyone who's interested in real estate—real estate investing, real estate agent, real estate wholesaling, anything real estate. If you want to be a part of that group, add yourself to that!

Thank you again for watching, and until next time!