Should You Invest In Gold

Should You Invest In Gold

It’s funny how times change. A few years ago, the housing bust put a lot of people in vulnerable situations. I remember these gold commercials constantly running. “Trade in your gold for cash!” Remember those? I’m sure they made a pretty penny melting down all that old jewelry. Now the commercials are the opposite, they want to sell us our gold back! Is it worth the investment? How good is gold, really?

Historical Performance of Gold

When analyzing the historical performance of gold, it really depends on the timeframe you look at. In periods where there have been market crashes or recessions, gold performance looks really good. When the economy isn’t a raging dumpster fire, the stock market returns can dwarf gold performance by 4 to 1. During my short lifetime, I can remember when we saw gold start skyrocketing to its eventual all time high in 2011 of almost $2,000 per ounce. Since then, the market has recovered and gold is now around $1,300.

Ultimately stocks will outperform gold. You can put your blinders on and pick specific timeframes that make gold look better than the rest of the market, but all that glitters is not gold. There are many different data sources that show how gold performs against stocks over the long run, and it really doesn’t compete in most of the categories. Below is a chart showing real returns for various indices using a $10,000 initial investment.

Total Real Return on $10,000 Initial Investment
Credit: Stocks For The Long Run by Jeremy Siegel

The big downside of gold is it doesn’t grow. It doesn’t earn. It’s a commodity that just sits there, looking shiny. That doesn’t mean it isn’t useful. There has always been a demand for gold throughout history for various purposes. But stocks, unlike gold, have the potential to grow into something bigger. Companies can increase their assets, they can go make profits and return them to you in the form of dividends. Gold can not. 

Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Warren Buffett

But stocks are so risky! Sure, stocks can be risky. But so can gold! The difference is stocks tend to bounce back relatively quickly. Gold can have dismal performance for decades. Since its high in 2011, gold has been declining, while we have been on the longest bull market in history. Imagine having sunk all your money into gold while the markets have been this hot, all the while your gold has been declining and not paying you any returns at all.

Prepping for the Apocalypse

So if stocks are better, why do I buy gold? Gold is a hedge. A safeguard to preserve your wealth, not increase it. If you had 10,000 ounces of gold a few hundred years ago, you would have been rich. If you have 10,000 ounces of gold at today’s price ($13M), you would still be rich. Gold retains its value, where fiat currency such as the dollar does not. When markets seem volatile, investors retreat to gold to try and preserve their current wealth and avoid taking the market hit.

Precious metals, gold especially, have always held value. It’s very popular in jewelry, but also has industrial uses in manufacturing electronics. Gold was also used as currency for centuries. The American Dollar was backed by gold reserves, for a short time. In the absolute worst situations, the type of situations we don’t believe are possible in this great country, gold would be a very valuable asset. If you look at Venezuela right now, their currency is so inflated that it’s seen covering the streets as trash. I can promise you will never see gold covering the streets! In the event where the fiat currency is no longer valid, everyone will go back to barter trading. Some chicken eggs for a loaf of bread and stuff like that. What is the next step up from barter trading? Gold and silver coins.

Venezuela's Money is Trash
Imagine seeing gold coins in the streets. Never going to happen!

You can buy gold in various ways. I like physical gold that I can hold in my hand. Read here to see how the major institutions have manipulated paper gold prices. If you buy gold as a safeguard for terrible situations, don’t you actually want to be able to collect your asset in the event those situations come to pass? Imagine telling the bank you want your gold mailed to you, and they respond that it hasn’t been mined yet, or that you don’t technically own it. No thanks. I want my backup plan mailed to me immediately. I like gold in small denominations, like tenth oz and quarter oz. Smaller increments make it easier to trade and use as a currency if I had to do that, which is why I buy it in the first place. I don’t think gold is a good investment, but it’s a good backup plan, so I keep buying it and storing it in my gunsafe with all my other plan B’s. When the zombie apocalypse comes, I’ll be ready!

Do you own any gold? What do you think of gold as a major part of your investment strategy? Share your story below!

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Brennan Reese

Brennan is a technology consultant for a private software company. He spends his free time musing about money.

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