20 Mar 2021

Reasons why I exited my gold investments

There’s a phrase that’s commonly used: “the straw that broke the camel’s back”. You keep adding straws one by one on the back of a camel and the weight keeps increasing. At one point, you add a certain piece of straw and the load becomes too much for the camel to bear. That last straw is the “one that broke the camel’s back”. Anyone that blames just that one straw is obviously focusing too narrowly and missing the bigger picture.

When I made a blog post about exiting gold, I stated gold’s inconsistent appreciation as the reason. Truth to be told, that was not the only reason. There were other reasons that were already pushing me towards exiting gold. Inconsistent appreciation was the metaphorical last straw. Here is the list of all the reasons.

  • Gold is a passive asset (also known as store of value). Gold appreciates in value only when others are willing to pay us a higher price for the same gold. This is qualitatively different from equity and debt. Equity appreciates because businesses create wealth; debt appreciates because we lend capital and earn interest. The passiveness of gold made me uncomfortable.
  • This is probably leaning more towards paranoia than skepticism, but I am also afraid of some scientific breakthrough making mining/refining gold cheap. Say, for example, harvesting gold from asteroids. They say aluminium used to be expensive until technology made it super cheap. How can we be sure that something like that will not happen to gold?
  • Triggered by these concerns, I set out to see for myself what gold adds to a portfolio. 15% was the maximum I was willing to allocate to gold. At 15% allocation, I didn’t see that much of an improvement to the portfolio (analysis spreadsheet). There was perceptible difference for sure, but the difference wasn’t significant enough to overcome the other concerns.
  • Finally, the long periods of stagnation or depreciation that I highlighted in my previous blog post.

To be clear, my stance is not that gold is a bad investment. I am only saying that I personally am not comfortable investing in gold. If you like gold, go ahead and invest in it. But know beforehand why you are adding gold. If you want to reap the benefits when gold is outperforming, you need the conviction to stay invested when gold is underperforming. If you don’t know what gold is adding to your portfolio, it’s hard to remain calm when gold is having a few bad years.

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