Why is Gold not an Investment Tool ? Vol. 999999

         Sardines, not Bullions

Whenever we have a rally in an asset class, discussions with my investors heat up about what is investment and what is not. We have our disagreements when it comes to investing in Gold (and Bitcoin recently), which to me is not an investment asset. Usually, apart from underlying, the timeframe you (plan to) hold the underlying defines a transaction as a speculative trade or as an investment.

Nevertheless, it is not necessarily an investment even if you hold an asset for years. My criteria, -though not original, Warren Buffet and some other investment moguls expressed similar views in their books- involves a positive yield throughout time, not only appreciation in the value. The difference is important because as an investor, when you don't have an appreciation in the price of the underlying, you still generate a yield/profit.

If you buy a stock with an expectation of an income stream in the company, I call this as an investment. The stock does not have to pay dividends necessarily, appreciation in the price is caused (partly) by the income the company generated.

In the case where the market expect the income of the company will increase enormously, then you will pay a premium for this expectation and the existing income stream won't be enough you to make profits. There you have a speculative position, you "speculate"​ that the income/profits will grow in time. (the case with Tesla and most of the Nasdaq companies)

Still, there is a share of investment in this decision, since you are buying stocks of an operating company. There is an activity and process of income generation. The bonds are definitely basic investment tools, no matter they have fixed or variable coupons, nothing to discuss here.

Real estate can be confusing, if you buy a residential or commercial property and acquire rental income, you made definitely an investment. If you buy land to develop a project on it, still you are an investor. But if you buy a land with the expectation of an appreciation in the price, there you have a speculative position. If the land does not appreciate for years, you won't have any income.

With currencies, again in theory one can claim it is an investment to buy another currency than the base currency of the portfolio. There you "invest"​ in the total economic performance of the country, (although especially for developed countries a positive economic performance does not necessarily mean appreciation in the currency). Usually you don't sit on cash and you buy long or short term bonds denominated in this currency, and that makes the investment component of the position. Currency appreciation can be called still speculation.

What about commodities and precious metals? These are pure speculation. Oil, wheat or gold do not have any yield. Most of them still play a part as input or output in production and therefore their price performance is related to the economic activity. This is also true for the industrial consumption of gold. (around 8% of total demand) Other than that, gold needs the perception as a hedge tool against inflation, as a safe haven for investors; and this will help gold to appreciate beside the inflationary pressures. On its own, it does not produce a yield. (If you are able to lend, which is possible for some entities especially in Islamic finance, there you have an investment with a yield)

The same is valid for Bitcoin and similar cryptocurrencies. They may appreciate, they may rally, but your return is through speculation, not investment. You may "hodl"​ Bitcoin for centuries and you won't have a yield. One can claim Bitcoin may be used as a proxy for digital economy, or crypto assets, and therefore you may "invest"​ in them through Bitcoin, such as investing in an emerging country's currency as a proxy of the country's economic performance. If Bitcoin represents that sort of activity, then this is true. (though emerging market currencies pay a higher yield to compensate the related risks whereas Bitcoin does not pay any yield)

Finally, there is nothing wrong to have speculative positions. Some investments are much riskier than some speculative positions. It is important to make the distinction right and understand what to expect from a portfolio. The opportunity cost, riskfree rate is almost zero or below zero in some currencies, so we are not talking of real (adjusted) returns as of now, but this may change in a near future.