4 Reasons Why Dave Ramsey Is Wrong About Gold
Personal finance personality Dave Ramsey has written an article called, “Why Investing in Precious Metals Is a Bad Idea." In his article he lists reasons why commodity investments such as gold and silver are not good investments.
There are a number of issues with that statement. First off, he doesn’t elaborate on his definition of what makes a “good investment.” Then he proceeds to list several reasons why investors “flushed money down the toilet” when they decided to invest in gold.
This article will challenge his statements and explain why it is not a bad idea to invest in gold, silver, and other precious metals.
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Dave Ramsey in 2012
Ramsey: Gold is not valuable because the U.S. dollar is not backed by gold.
Here’s why he’s wrong:
Here's a quick history lesson. The U.S. dollar used to be backed by gold. But in 1933, it fell off the gold standard under President Roosevelt, who suspended the gold standard. In 1971, President Nixon enacted a bill that ended the dollar convertibility to gold. This was done to manage inflation and dissuade international governments from recovering more dollars for gold. Today, the value of the dollar is not backed by anything—only the full faith and credit of the U.S. government.
Aside from the little history lesson, Ramsey's statement that gold isn’t valuable, simply because the U.S. dollar is not backed by it, is not a sound argument. Because the value of the dollar is no longer tied to the value of gold. They have to be assessed as two separate assets.
The value of the dollar is influenced by the actions of central banks all over the world. In the U.S., the Federal Reserve controls the money supply in the economy. It has the ability to print money if there is a need to stimulate the economy, just like it did during the pandemic. Money printing increases the supply in the broader economy. Without an accompanied increase in demand, the value of the U.S. dollar can decrease over time.
There is still a relationship between the dollar and gold.
On the other hand, gold, which used to be used as a medium of exchange, is a precious metal that holds intrinsic value and has many use cases. Its value fluctuates due to supply and demand but has increased over time. Historically, investors flock to gold when there is economic uncertainty because overall it is a stable asset.
The precious metal gold has been the standard throughout history. While the dollar isn’t backed by gold today, a relationship still exists between the dollar and gold: Gold’s price and value is expressed in U.S. dollars. When the value of the dollar changes, so can the price of gold.
Digging deeper, this means that when inflation is high, goods and services cost more, making the U.S. dollar weaker. That said, when the U.S. dollar falls, gold and silver rise because they are less costly when purchased with other currencies.
Ramsey: Precious metals will not save you from inflation.
Here’s why he’s wrong:
In his article, Ramsey repeatedly says that “precious metals will not save you if inflation hits,” but he fails to give a reason why. Ramsey is misguided in his statement about precious metals and inflation and here’s why.
Gold, silver, platinum and other precious metals are real assets. Real assets hold intrinsic value. Tangible assets derive their value from their physical properties and multiple use cases. Investing in physical assets comes with many benefits such as moving in a similar direction to inflation.
Historically, returns from real assets have a high correlation with inflation. This means that when prices of goods and services in the economy rise, prices of commodities such as precious metals like gold, silver and platinum increase as well.
Furthermore, investors tend to turn to these safe haven assets during times of market or financial uncertainty. That’s because historically, real assets have performed well compared to traditional assets like stock and bonds in inflationary environments, such as the one we’re in right now.
Precious metals tend to have steady supply and demand through different economic environments. Thus physical gold, silver, and platinum are stable investments that investors like to hold especially during times of economic instability or in a recession.
These intrinsic characteristics are what make precious metals a sound portfolio diversifier. Precious metals are known for having a low correlation to financial assets such as stocks and bonds. They tend to be helpful assets to hold to help stabilize portfolio volatility.
Overall, it’s important to take a long-term view on precious metal prices because in the short-term there may not be much price movement. But over time as their value appreciates, gold and silver investments tend to be suitable long-term hedges against inflation.
Gold tends to hold its value during periods of market volatility and high inflation.
Ramsey: Prices of gold and silver are unstable.
Here’s why he’s wrong:
Just like any asset, prices of precious metals rise and fall in the short-term but over time, their value increases. This does not mean prices of precious metals are unstable, but they can sometimes be volatile. Volatility is a normal and a healthy occurrence in the markets, not something to fear.
Ramsey says the prices of gold and silver are unstable, but the better word here is volatile. Prices of precious metals can be volatile, but so are the prices of stocks and other asset classes. Volatility of asset prices is normal and actually provides opportunities to profit off of these price swings. Volatility is a chance for investors to buy precious metals at a cheaper valuation and sell them at a later date for a profit when their prices rise.
It’s important for precious metal investors to know the price dynamics of gold, silver, and other markets. You can adjust your investment strategy and prep your portfolio for the long-term. For example, the price of silver is known to be more volatile than gold because the market for silver is smaller than that of gold.
These price changes may cause fear among some investors. Keep in mind that volatility in the short-term is normal and tends to level out over time.
Ramsey: Precious metals have a low rate of return.
Here’s why he’s wrong:
Gold is an asset that does not produce cash flows, nor is it an interest-bearing asset. But gold and other precious metals offer protection on your cash against inflation. You can think of it as insurance on your money. Sticking with this analogy, insurance may not yield impressive returns, and it’s not supposed to.
Gold and silver help protect your wealth while it grows.
It can be helpful to familiarize yourself with the merits of precious metals as it relates to their role in the economy. Silver, for example, can be a great investment bet because when the economy grows, prices of silver can increase alongside. This is because silver is used in many products that we use everyday such as smartphones, tablets, laptops, electric vehicles and many more.
Spot prices of precious metals are impacted by supply and demand, and these two variables can change at any time. Gold investors ought to know that they are investing in a stable asset class whose price can be influenced by several factors. But let’s not discount the value-add it has historically made for investors over time.
Investing in Precious Metals for Wealth Preservation Has Value
There are always two sides to every coin. When investing in any asset, there will always be pros and cons. That is why it’s reasonable for there to be critics of certain investments.
Precious metal investments have come under scrutiny for a long time. Gold, silver, and other precious metals may not be the investment for everyone. But that doesn’t mean the value they have brought to investors for ages should be diminished.
Written by Paulina Likos
Read more about investing in precious metals from the author:
Investing in Gold for Beginners
Investing in Palladium: Is Palladium a Good Investment?
How to Invest in Gold and Silver IRAs