Gold doesn’t create wealth

Q: Should I ditch stocks, bonds for gold, silver?

Answer: Gold and silver work well as a store of value. There’s a finite amount of gold and silver in the world, so their value tends to keep up with inflation, for example. However, a store of value and a good investment are two different things.

I tend to agree with Warren Buffett’s biggest issue with gold and other precious metals as investments: They are “unproductive asset( s).” Specifically, gold doesn’t create wealth. Its value is simply whatever the market says it is, but over time, one ounce of gold will still be one ounce of gold.

Meanwhile, stocks represent companies that generate returns, which can, in turn, be invested. If you buy 100 shares of a stock that pays a dividend, reinvesting those dividends could turn those 100 shares into 200 shares or more over time, in addition to any appreciation of the share price.

In other words, stocks and bonds are valuable because of the income they can generate (either immediately or over time) for their owners. Gold’s value is based solely on what someone else is willing to pay for it.

To be clear, I’m not suggesting that people shouldn’t buy gold and silver at all. In fact, I have some of my own money in precious metals, mainly as a hedge against inflation. During periods of high inflation, it’s possible, if not likely, that gold and silver will outperform stocks.

However, over time, you’re better off keeping your money in a diverse portfolio of productive assets such as stocks, bonds and real estate.