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The other day, a Twitter troll was trying to convince me that I was making a mistake by investing in the stock market. He claimed that he was a superior investor because he invested in gold.
This guy then cherry-picked some stats. He touted the return of gold since January 2000, stating that gold has risen from $280/ounce to over $1,300/ounce. That is a return of 472%. In contrast, the S&P 500 has risen from 1,498 to 2,604 in the same time period, a return of only 173% during the same time period.
On face value, he puts together a pretty sound argument. However, we all know that you need to do a little bit more research than that when it comes to investing.
Unlike gold, the S&P 500 provides dividends. Thus, a return of 173% is not quite the total return of the S&P 500 over the 18 years. When you reinvest the dividends, you will see that this increases your total return to 246% over the same period.
But even still… gold has done substantially better over the past 18 years, right?
The History of Gold
Well, first let’s discuss why people usually flock to gold.
Since the dawn of time, gold has held audiences captive. The first known evidence of human interaction with gold occurred in Egypt around 3,000 B.C. At that time, Pharaohs and temple priests greatly valued gold. In fact, the capstones on the Pyramids of Giza were made from solid gold.
Quick fun fact: the capstone on the Washington Monument is made up of aluminum.
Wonder why?
Aluminum was one of the most expensive metals back in 1885 during the construction of the Washington Monument. However, just two years later, the Hall-Heroult process made aluminum easier to produce, which caused the price of aluminum to plummet.
Okay, back to gold. The Egyptians were the first to create a currency exchange ration, which mandated that 1 piece of gold was the equivalent to 2.5 parts silver.
However, the Egyptians didn’t really use gold as currency.
Egyptian actually used agricultural products, like barley, within their bartering system. The Lydian merchants, of modern Western Turkey today, were the first to use gold as currency around 700 B.C. They produced coins called electrum, which were a mix between 44-55% gold and the remaining silver.
As you can see, gold has been around for a long time.
Gold as a Crisis Hedge
Fast forwarding a little bit, since the 1970s, when the U.S. came off the gold standard, gold has been used as a crisis-hedge when the next upcoming crisis was upon us. I’m sure you have seen one of the countless commercials that tell us that the stock market is going to plummet and that we should hedge with gold.
The Valuation of Gold
The problem with gold is there is no logical way for us to value gold today. Gold cannot be an investment as it never produces anything. The growth is completely dependent on someone’s belief that someone else will pay more for it in the future. Hopefully, you are seeing some of the similarities that gold has with Bitcoin and even the Beanie Baby craze of the 1990s. My wife recently found her old Princess Diana beanie baby. Too bad that thing is virtually worthless today. All that to say– gold, like Bitcoin and beanie babies, is not a productive asset.
Gold is not like a stock or even a bond. It does not pay a dividend or interest. Gold does not contribute to economic growth in the future. Hiding gold in a safety deposit box isn’t useful in growing businesses. The value of gold has always been driven by the fear that other asset classes will lose value and that therefore, gold will hold its value.
The problem with that is that gold’s value is completely determined on what someone else will pay for it when you are trying to sell it.
I do not believe that the stock market operates the same way. Companies that you buy into actually have ways to value themselves. There are balance sheets, income, and cash flow statements to evaluate a company’s worth.
How should you value gold today?
Some people think that it should be valued how it has always been valued. Back in the Roman ages, a Roman toga, belt and sandals cost one ounce of gold. So today, theoretically, the value of gold should be related to the cost of a quality men’s suit, belt and shoes. While there is some rational thinking behind this, admittedly, using a standard from 2,000 years ago seems a bit silly. However, if you think about it, a total of $1,300 isn’t far-fetched if you include a high-end suit, belt, and shoes.
But, gold costs you money to store. Let’s say that you’ve accumulated some gold along the way. Do you really want to store gold at home? Not exactly safe.
I know that in certain cultures, it isn’t uncommon to receive gold as a gift. However, the reason why I know this isn’t a good one. There was a rash of break-ins in my neighborhood a couple years back. What did they all have in common? Each home had a fair amount of gold in their homes. Many of these families lost thousands of dollars in gold as a result. I guess you have two options with gold- either store it in your home or in a lock box at the bank, which costs additional money to hold an “asset”.
What About Inflation?
I wish there was a direct correlation between inflation and gold rising at the same rate, but there isn’t. If you’re worried about inflation, you should be looking at Treasury Inflation-Protected Securities (TIPS) without the wild swings of the market.
Here is a chart of gold over the years. As you can see, gold has returned the same amount as the TIPS over the long term, without the volatility of the market. Most prefer that the market has a consistent arc that increases over time. The peaks and valleys of the gold market are not for the faint of heart.
Gold Price History in 1960–2014
Okay, back to my dear Twitter troll. His argument was that gold is a great investment over time. However, if you look beyond the 18-year horizon and instead look at the value from the start of the S&P 500 in January of 1928, it took 0.85 ounces of gold to buy a share in the S&P 500. Today, it now takes 1.95 ounces of gold to buy a share in the S&P 500. This means that gold has lost value, relative to the price of the S&P 500. So, why wouldn’t you invest in the S&P 500, since it has held up over time through numerous wars, recessions and Presidents?
Does this mean that you should never invest in gold?
If you have access to the internet and have the wherewithal to learn about the stock market and its returns, I would say there is no reason to buy gold.
However, if you live somewhere in the world without access to banks and have zero trust in the financial system that you live in, then maybe that makes sense. But really think before you do that. There should be at least one stock exchange that you trust to invest your money in.
Hopefully I have laid out an argument as to why gold is not a wise investment, but really just a hedge from crisis. While I personally don’t feel comfortable holding gold in my portfolio, I know some are convinced that it is a critical component of theirs. Until I see stronger data that backs up adding gold to my portfolio, I plan to continue investing in assets that I can properly value, like the S&P 500.
I feel to that people think of gold the way it was back before Nixon. Currency was backed by gold (or so they said), then we turned to fiat currency instead.
I’m more interested in stocks due to the underlying businesses selling a product, getting the profit from that product, and then sharing the wealth with their investors. That’s my kind of investment!
I’m right there with you Chris!!! Gold isn’t an asset that I care to invest in at this point 🙂
Agree. Never been a gold bug. I owned a precious metals mutual fund once that held a lot of the miners, but got out of it. I like investments that pay me in cash. Tom
Tom @ Dividends Diversify recently posted…It’s All About The Cash
Hahhaha…I totally agree. I’m want companies that throw off cash 🙂
Being impartial in trading this blog, it’s. A good article. However I disagree that there is no reason to buy Gold. I am of a different mindset and from a different camp. I don’t see gold as an investment, I see it as owning an insurance policy. I elaborate in an article I recently wrote on my blog site:
https://firechecklist.net/2018/04/01/alternatives-part-iii-cash-bullion/
Thanks for sharing Mr. Fireby2023!!! I’ll definitely take a read. I’m always interested to hear different points of view 🙂
Agree with you about Value being what someone else is willing to pay for it. Though. That is part of my underlying issue with investing in the stock market verses gold. All “money” is is a medium of exchange. That being what someone else is willing to exchange. This boils down to one word… trust. The trust in valuations of other parties. When you invest in gold, you tangibly own it (physical possession) verses an electronic record such as a stock market. (No longer physical stock certificates). That being the case, when you own an ETF or stocks you own a claim on those stock assets. There are more claims on the underlying assets then assets to claim. It is essentially musical chairs. The Japanese central banks currently own about 70% of the Japanese Stock ETFS. Plus with QE / Stock Buy backs companies are boosting share prices with “printed FIAT money” and DEBT. Every single FIAT currency has failed throughout history. America is touted as “never failing” since the system hasn’t “failed” yet. Gold is CRISIS insurance. I would feel much more confident owning tanglible assets. P.M., Land, Cattle, etc. Then stocks and especially BONDS. YOU DO NOT OWN SOMETHING UNLESS IT IS IN YOUR POSSESSION. This includes, cryptos (held on exchanges or 3rd party wallets), Gold / silver. Also. If gold isn’t valuable why are central banks around the world massively increasing their gold reserves and asking for Gold held by 3rd parties?
“Whenever you find yourself on the side of the majority, it is time to step back and reexamine your beliefs.” – Mark Twain
Thanks for the thoughtful response Henry!!! You have a very reasonable argument and while I may disagree…it’s worth tracking over the 20-30 years to see how our predictions play out 🙂
Agreed. I generally view gold in context of price when I was a kid, early 80s. Based on that gold has lost value even in dollars over the decades. I can’t even think of another asset class that’s performed worse over the last 37 years.
FullTimeFinance recently posted…Guide to Credit Card Churning
A counter thought… would you say that maybe it’s time to consider it because it’s been beaten down for the last 37 years?
Erik @ The Mastermind Within recently posted…Think Critically. Personal Finance is Personal. Do What’s Right for You.
Hahaha…always the contrarian 🙂
Yeah it’s been surprising how much it’s still rooted in belief that it’s a “good” investment. Insurance maybe, but even that at times feels like a stretch 🙂
I don’t have gold in my portfolio either. But i know people that do and they swear by it.
I think diversification is key. Why not hold some gold and hold positions in the stock market?
CJ recently posted…How Wealthy People Stay Wealthy | 6 Reasons Why
I personally feel like there may be some other things that diversify me away from the stock market better like TIPs but honestly if someone holds gold and has done their research, I say more power to them 🙂
Totally agreed. My argument with these folks is that gold at its highest value still wasn’t equivalent to an inflation adjusted value of gold in the early 1980s at $800 an ounce. People who stayed in gold for the past 30 years have lost money, not even been close to making it.
Besides if they economy does tank what does that person think he can do? Bite off a hunk of gold and trade it for bread?
If the economy collapses we will all be bartering. That will be the currency. And gold will basically be “worthless” as a medium of exchange.
Jason recently posted…Credit Cards and Renting a Car
Hahha…I totally agree with you. Who wants gold if you need bread to eat 🙂
All that glistens is not gold…………
But I do have a small amount of gold in my portfolio, mainly as a hedge type choice instead of bonds.
Ms ZiYou recently posted…Sunday Short #4 – Spring
Thanks for sharing Ms. ZiYou!!! I have friends that swear by gold and others that have just enough as a “lottery” ticket play if it were to explode up 🙂
I haven’t held actual physical gold. The only closest thing I held was a leveraged ETF that tracks gold. And I only had it for a short period of time. That was purely luck when it was going up by quite a bit and I had no idea what I was doing, so I just sold it when I saw decent gains lol! I have to admit that was just me gambling and throwing darts with a blind fold on. I also remember it being quite the hype since the crisis up until 2011 or even mid 2012 ish?? Can’t remember exactly…
After when markets were going up with all the QE being implemented, gold took a pretty huge hit (so everything gold related followed the same direction). Had I continued to hold the leveraged gold ETF, I would’ve been screwed over. I didn’t want to touch gold again because I never understood it. I think that’s when I started to learn how to buy stocks and funds with my account and I was just fooling around.
Thanks for putting together this post. It was very informative and I really liked your stats and facts. Great job here, Rob!
fin$avvy panda @ finsavvypanda.com recently posted…Rich Dad Poor Dad: Book Review
Hahaha sometimes the lucky investments are the best investments. One of my friends bought the wrong shares of stock and it ended up getting bought up before he had a chance to sell the shares 🙂 Sometimes it’s better to be lucky than good!!!
I inherited 10 $20-gold coins from my late dad, dating from 1888 ’til 1928. I “think” they are worth about $1,300 each now (give or take a bit), and I have been reluctant to sell them, partially due to sentimental reasons.
Should I reconsider or perhaps wait a bit ’til the value of gold rises a bit again?
Thanks for stopping by Bernard!!! I personally don’t hold gold because I don’t think it’s an investment but I hear lots of people purchase gold to diversify their portfolio. Sounds like you have some really awesome sentimental coins from your late dad 🙂
The reasoning you mentioned is somewhat convincing but I won’t agree that gold is bad investment. However, a very well written post keep up the good work!
Great post! Thanks for sharing the information and keep posting more.
Liam Patterson recently posted…Why You Should Diversify Your Precious Metals Portfolio
Cherry picking returns… classic. I’m also avoiding gold. It’s an inflation hedge in the long-term (over many decades) but in the short-term, it’s terrible. It’s too volatile and it’s a prime case of fools theory. I’ll stick to TIPS if trying to hedge for inflation in the short term… and long term, stocks to far outpace the shiny metal returns.
Frugal Fortunes recently posted…6 Reasons Why Gold is a Bad Investment