Why Gold is a Better Investment Than Bonds

Why Gold is a Better Investment Than Bonds
by: Ben Tseytlin - on Gold & Bullion

Many investors believe that bonds make an excellent investment vehicle whereas investing in gold is seen as being volatile. However, below are some reasons why the opposite is true, that bonds are actually far more risky than gold coins and in the long run will not protect your wealth to the same extent.

Why Many Investors Traditionally Prefer Bonds

A lot of investors prefer bonds than investing in gold because they are perceived as being less risky than equities. This belief was reinforced in 2008, when the financial crisis prompted many investors to exit equities in favor of bonds. Although the returns from bonds tend to be less than equities, they are guaranteed and backed by the government which gives many people peace of mind.

However, the financial outlook for governments around the world isn’t rosy, particularly in the United States, Europe and Japan. All the governments in these regions carry huge amounts of debt, and the American government’s response during the crisis of 2008 was to use large bailouts and stimulus. Many financial pundits at the time concluded that these moves were merely a band aid that would not halt the financial hemorrhaging over the long run. The root of the crisis was excessive debt, and government’s solution was to simply issue more debt by using the U.S. Treasury and Federal Reserve to flood the economy with more dollars that increased both the money supply and inflation for most Americans. If this is the government’s response to a financial crisis, why on Earth would anyone trust the bonds issued by them?

Gold Is Superior To Bonds In Almost Every Way

To be sure, investing in gold might not pay interest the way bonds do, but it also isn’t an instrument of debt. Gold does well during inflationary periods and moments of uncertainty, whereas bonds tend to be harmed by inflation. This is because inflation depletes the bond’s purchasing power from its principle balance as well as the yield. Furthermore, many investors make the mistake of trusting the CPI (Consumer Price Index) when it comes to the inflation rate, but when you investigate it carefully, you find that its data cannot be trusted.

This is because the technique for calculating CPI was altered during the 1980s. For example, rather than incorporating a basket of goods that is fixed and which represents a specific living standard, today’s technique uses hedonic adjustments, geometric weighting and substitution. Economists that use the pre-1980 CPI calculation technique believe that true inflation is much higher than the government admits. The proof can be seen in the price of homes (especially on the East and West Coasts of the USA), the cost of rent in major cities and the price for tuition at colleges. This makes any interest gained from bonds miniscule at best.

Another advantage that gold has over bonds is that gold cannot be defaulted on. Bonds are vulnerable to downgrades in credit rating and it is possible for governments to default on them completely. Given the extreme debt levels that governments around the world maintain, which only continues to grow, holding bonds over the long term is incredibly risky.