We have all seen the advertisements and headlines that keep telling us that investors need to flee to safety and buy gold. They will tell us that the stock market is going to crash worse than last time, and that investors need a hedge to inflation with gold. They will say it with charisma and inflict fear upon us as investors. Even I have found myself looking into gold as an investment.
I have put in the research, and gold as an investment does not make sense for most investors, especially long term investors.
Show me the Data
1″Gold peaked just shy of $700 an ounce in 1980, then fell and did not again hit that level for 27 years. It started this year at $1,657, and has fallen about 18% to around $1,355, while the Standard & Poor’s 500 Index has gained about 18%.
The cause of these ups and downs is always open to debate. When the price of steel rises or falls, the reason can usually be found in the pace of world economic growth. Grain prices are heavily influenced by the weather. But gold rides waves of emotion.
Because of inflation, a dollar acquired in 1802 would have been worth just 5.2 cents at the end of 2011. A dollar put into Treasury bills at the same time would have grown to $282, or to $1,632 had it gone into long-term bonds. Held in gold, it would have grown to $4.50. True, that’s a gain even with inflation taken into account. But the same dollar put into a basket of stocks reflecting the broad market would have grown to an astounding $706,199.
As a compromise, investors can buy stocks in gold mining companies, says Allen. These stocks give shareholders the right to share in cash flows, and they tend to benefit when gold rises”
Let’s look at Gold’s return over the last 35 years. I chose 35 years because that is about the number of years that investors should be invested while saving for retirement.
2“over the past 35 years, the average annual real (inflation–adjusted) rate of return on gold was 1.56 percent.” That is nowhere near the returns that were received over those years in equities.
Gold as a hedge against inflation
3″From 1836 to 2011, the average real rate of price change for gold in the United States is 1.1% per year and the standard deviation is 13.1%” This means that there is only a 68% chance that the 1 year price change on gold will be between -12% and 14.2%, and a 32% chance it will be even more volatile. In Layman’s terms, gold prices have had large swings in price instead of giving constant steady growth.
Final Say
Past performance is no guarantee of future results, but in my opinion gold is not a good hedge against inflation, and it is not a good long term investment. Invest in a globally diversified portfolio filled with equities and short term fixed income.
-By Jimmy Hancock
References
1. “Investing in Gold: Does It Stack Up? – Knowledge@Wharton.” KnowledgeWharton Investing in Gold Does It Stack Up Comments. Wharton School of the University of Pennsylvania, 22 May 2013. Web. 15 Apr. 2014. <https://knowledge.wharton.upenn.edu/article/investing-in-gold-does-it-stack-up/>.
2. Villarreal, Pamela. “The Return(s) To Gold.” The Return(s) to Gold. NCPA, 16 June 2011. Web. 15 Apr. 2014. <http://www.ncpa.org/pub/ba747>.
3. Barro, Robert J., and Sanja P. Misra. “Gold Returns.” NBER. National Bureau of Economic Research, 1 Feb. 2013. Web. 15 Apr. 2014. <http://www.nber.org/papers/w18759>.