Is Gold a good investment?

In many parts of the world, including in Vietnam and India, gold has historically been used as an investment, as the graph below shows:

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Although some of it is for jewelry, that is also used as part investment and part aesthetics.  The question is, is gold a good investment for the general public, and is gold a good investment for retirees in particular?

Many gold bugs boast that the yellow metal is a source of value, and holds its value over a long period of time.

That is to say, right now the price of gold is about $1,200.  In another 100 years, you should be able to buy as many products and services with that bar of gold, as you can today.  It is certainly true that gold has held its value over long periods of time.

If a family would have invested $1 in gold in 1800, the gold would now be worth about $30. That isn’t factoring in inflation though, and it doesn’t pay any dividends. In comparison,  a dollar invested in the U.S. stock market would have grown to over $12 million!  Yes you read that right, 12 million.

I am sure many people are thinking that that is only because US Stocks performed particularly well from 1800 until the 1929 Wall Street Crash.

This is because America was still developing.  Let’s look at the Dow Jones from 1900 until today:

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The Dow didn’t hit 1,000 until 1983. It hit 26,800+ a few weeks ago. The Dow, S&P and Nasdaq have had good and bad years and decades. But the indexes have consistently given investors a 10% average yearly return, or about 6.5% above inflation. The ride is wild at times, but it pays off to sit it out.

Now let’s look at how gold has performed, in inflation adjusted terms:

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As we can see from the graph above, the price of gold has held it’s value from 1970 until 2010.  The price of gold is now similar in 2018 compared to 2010, which further shows the point.

However, not only is gold down compared to 1980 in inflation adjusted terms, but the overall rate of return hasn’t been good from 1970 until today.

In 1978, the Dow: Gold ration was down at 4:1, with the Dow Jones at $800+ and gold at around $238.  In 2018, the Dow Jones peaked at $26,800, with gold at $1,200, so the ratio is now at 20:1+.

There is an obvious reason why this is the case.  The S&P is just the 500 biggest stocks in the US.  It is self-cleaning.  The survival of the fittest is at play.  The weak companies get eaten up by newer competitors.

Now GE has been knocked off the Dow, there are no longer any original firms on the index.  Anybody here heard of American Sugar Refining or United States Rubber Company?

In another 200 years, few people would probably have heard of Amazon, Facebook, Netflix or Google.

As companies get more and more efficient and the stock market is just the biggest firms, investors get wealthy long-term.  The short-term is just noise; in the long -term the fundamentals of the companies is the most important thing.

Gold’s supply and demand, in comparison, is fairly stagnant.  There are periods where gold performs excellently, for example during 2000 until 2011. Every dog has its day.

Being a rational investor is tough.  It often means being a contrarian in your own culture, and going against base human nature.

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