why bullion is a terrible investment

Let’s say you got caught up in the gold and silver bullion frenzy back in February this year, when the mint had supposedly run out of gold, and bullion was trading on Ebay for above market prices. You manage to find a bullion dealer who has a couple of 1 oz ingots left. You hand over $3200 and start walking out with them.

Scenario 1

Your mobile rings before you leave the room. It’s your son. He’s in real trouble now, and if he doesn’t get $3000 to pay a fine today he’s going to jail and will be gang-raped by bikies. You go back to the counter and say you’ve changed your mind. The dealer says he’ll give you $3000 for them. You ask why, when you paid $3200. “It’s the buy-sell spread”, says the dealer, puffing on a Cohiba, “I have to make a living”.

Scenario 2

Same as 1, only you get the phone call four months after the purchase. You take the ingots back to the dealer, who gives you $2200 for them.

Scenario 3

Same as Scenario 2, except its 2010 and deflation has broken out. You only get $1200 for the ingots.

Scenario 4

Hyperinflation has broken out. Your ingots are now worth $50,000, but that will only buy you a new TV. The experts are saying that the hyperinflation has peaked, so you should obviously sell the ingots. You do so, but they would have been worth $500,000 if you’d kept them a few months longer.

Scenario 5

You buy the ingots but they get lost or stolen.

However you play it, it’s very unlikely you’ll ever make any money on bullion. It’s not designed to make you money, as its value is relatively constant over time. Most small investors buy it when its price is relatively high, because it has negative price elasticity (i.e. the more expensive it is, the more people want it). There is no way at all of telling when the best time is to sell it. It is not suitable for traders because of the slippage (the large buy-sell spreads, costs of security, etc).