What Those Gold Advertisements Aren’t Telling You

We have all heard the advertisements on the radio 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 a little fearful at times.

I have put in the research, and gold as an investment does not make sense for most investors, especially long term investors.  Gold as an investment may give some assurance to the leery, older investor, but the numbers just don’t add up like you might think they do.

Show me the Data

The reason gold is not good as a long term investment is because the growth of the price is extremely low compared with stocks.   Check out this paragraph from article I found.

“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.” 1

1 single dollar grows to almost a million dollars in stocks, but in gold it grows to $4.50.   That stat alone teaches us not only the weak gold price growth, but the extreme growth potential in stocks.

So what about more recently?  Let’s look at Gold’s return over the last 25  years

Over the last 25 years the real return(inflation adjusted) of gold was a measly 1.5%, and 4.1% before inflation adjustment.  2. Stocks as indicated by the S&P 500 over the last 25 years had a return of 9.62%. 3.  That is over 5.5% per year increase compared to gold.  Yes, that includes 2008 stock market crash.  If you understand the value of compounding, you know you can’t afford Gold’s return in a long term portfolio.

The current price of an ounce of Gold is $1281.80.  This is a far cry from where it was just a few years ago when it reached its peak above $1900 in 2011. 4.  If you jumped on that bandwagon, you have hopefully learned a valuable lesson.

Gold as a hedge against inflation

A lot of people that invest in Gold do it knowing about the low long term returns.  The reason they give is it is a hedge against inflation.   I understand this side and its merits, but have 2 minor push backs to that.  First of all, how can you compare the inflation rate, a very constant thing year after year, to the price of gold, which bounces around on extremes year to year.   Second of all, how are stocks not a better hedge against inflation?  If the CPI goes up due to inflation, stock prices also increase.  We saw that with the huge growth rate of stocks back in the 80’s when inflation was very high.

One Case for Gold

The only reason I would ever advise someone to buy gold, is if they believe that a catastrophic, life altering event is coming in the very near future.  If you think we are going to go back to hunters and gatherers and that capitalism will disappear, then I suggest you buy gold.

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.  Investing in Gold is better than keeping all of your money under your mattress, but this is a good, better, best argument. If you are scared of stocks it is most likely because you or someone you know has gone about investing in stocks completely wrong in the past.   To win financially for retirement, invest in a globally diversified portfolio filled with stocks and short term fixed income.

-By Jimmy Hancock


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. Carlson, Ben. “A History of Gold Returns – A Wealth of Common Sense.” A Wealth of Common Sense. N.p., 21 July 2015. Web. 18 Aug. 2015. <http://awealthofcommonsense.com/a-history-of-gold-returns/>.

3. “S&P 500.” Wikipedia. Wikimedia Foundation, n.d. Web. 18 Aug. 2015. <https://en.wikipedia.org/wiki/S%26P_500>.

4. “Yahoo Finance – Business Finance, Stock Market, Quotes, News.” Yahoo Finance. N.p., 5 Jun. 2017. Web. 5 Jun. 2017. <http://finance.yahoo.com/>.

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