By Michael "Drew" Tyler, CFA | September 2025
It's essential to look at any asset with a critical eye. When we apply this standard to gold, we find that its significant drawbacks can often outweigh its purported benefits. While its historical allure is undeniable, here are the primary reasons investors should proceed with caution before making gold a core part of their strategy.
1. Gold is a Non-Productive Asset
The foundational principle of investing is to own assets that work for you. A share of stock represents ownership in a business that produces goods, sells services, and aims to grow its earnings. A bond is a loan to a government or corporation that pays you interest. These are productive assets they are expected to generate cash flow.
Gold, on the other hand, is a non-productive commodity. It sits in a vault. It pays no dividend, no interest, and generates no earnings. The only way to make money from gold is to hope that someone in the future will be willing to pay more for it than you did today. This makes it closer to speculation than to a disciplined investment.
2. Its Value is Driven by Sentiment, Not Fundamentals
Because gold has no earnings, no cash flow, and no balance sheet to analyze, its price is almost entirely driven by supply and demand, which is largely based on human emotion and sentiment. Its value can be influenced by:
• Fear and Greed: Demand often spikes during panics and subsides when markets are calm.
• Consumer and Industrial Demand: Changes in its use in jewelry or electronics can affect its price.
• Mining Discoveries: A new major gold discovery could, in theory, increase supply and impact its value.
This reliance on external factors and investor psychology can make gold surprisingly volatile, often behaving in ways that are disconnected from the fundamentals of the real economy.
3. Unfavorable Tax Treatment
This is a significant and often overlooked drawback for U.S. investors. The IRS, as of this writing, does not view gold as a traditional investment; it classifies physical gold and most gold ETFs as "collectibles."
This means that if you hold gold for more than a year, your profits are not taxed at the favorable long-term capital gains rates (0%, 15%, or 20%). Instead, they are taxed at the higher collectibles tax rate, which can be as high as 28% (depending on your ordinary income tax bracket). This tax drag can significantly reduce your net returns, especially when compared to the tax treatment of stocks and bonds.
4. Significant Opportunity Cost
Every dollar you allocate to a non-productive asset like gold is a dollar that is not allocated to a productive asset. While that dollar sits in gold hoping for price appreciation, it is missing out on the powerful, wealth-building forces of compounded dividends and interest payments from a diversified portfolio of global companies and bonds. Over the long run, the opportunity cost of holding a significant position in a non-yielding asset can be immense.
Conclusion
A sound investment philosophy is often centered on owning productive, cash-flow-generating assets. The most reliable path to achieving long-term financial goals is typically a disciplined strategy built on a diversified portfolio of these types of assets.
While gold has a fascinating history, its lack of intrinsic yield, reliance on speculation, unfavorable tax treatment, and high opportunity cost make it an unsuitable cornerstone for a serious, long-term financial plan. Before adding any single commodity to a portfolio, it's crucial to understand how it fits within your overall financial plan and risk tolerance. Consulting with a qualified, fiduciary financial advisor can help provide that clarity.
*This post is for educational purposes only and should not be considered financial advice.