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Why buying gold shares could be a waste of money

Despite the modern world we live in, many household investors can’t shake the old-fashioned idea that gold is a hedge against inflation, and protection against economic uncertainty. It would be nice to have your assets in gold during a ‘Great Depression’ kind of event, but even then it’s not a sure thing.

I’m not saying that you can’t make money in gold, indeed if you do your research thoroughly and pick good companies – like any investment – then there is money to be made. However, if you’re buying gold as a hedge against inflation or misfortune, your faith may be misplaced.

Shares in Newcrest Mining Limited (ASX: NCM), EVOLUTION FPO (ASX: EVN), and St Barbara Ltd (ASX: SBM) are all up more than 100% in the past 12 months, thanks to rising gold prices and a weaker Australian dollar. The recent ‘Brexit’ decision added another 10% or more to each company’s price, as gold soared to US$1,350 an ounce.

However, if you think you’re safeguarding your portfolio and your wealth with gold, it’s not an ideal decision. Here’s why:

  • Gold is a commodity, and price is governed by supply and demand

Sure, prices spike when uncertainty hits, but higher prices also incentivise miners to mine more, increasing production and ultimately depressing prices.

  • Gold doesn’t do anything

Mostly it just sits there, like you’re doing right now. There’s also not a lot of compound growth to be had with gold – rather, the value of your investment moves in cycles.

  • Demand for gold is not defensive

A significant amount of gold produced is used by jewellery makers and in industrial applications. If the global economy heads south, demand for jewellery will probably fall and so will demand for gold – even if demand does spike initially as a result of uncertainty. Contrast this with something like a healthcare company that produces literally life-saving treatments – there’s no question whose products take priority in a downturn.

You’d be mad to think that bricks of gold are more defensive in poor economic times than life-saving products from the likes of CSL Limited (ASX: CSL). However, if your aim is to protect against high inflation, there are also better opportunities than precious metals.

Real estate and bonds jump to mind, and both can be traded on the ASX through Real Estate Investment Trusts (REITs) and Treasury-backed bonds. The Motley Fool Australia doesn’t cover bonds, but curious investors can find a list of them here.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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