Every so often, gold takes center stage in the investment community. Typically, this occurs during uncertain times. The thesis is simple: Gold is secure and a great place to hide your money in a panicked environment. The past four months (or even further back for the clarvoyant) the planets have aligned for the so-called “gold bugs,” and now, not only is gold a fabulous hideout, it is also….. A great investment! In words of the great Lee Corso… not so fast my friend.
Over the past year or two, gold has performed well. Recently it hit an all-time high just below $2,000 an ounce. For the year, gold is up nearly 30%! In 2019 it finished up nearly 19%. Not the 30%+ the stock market did, but 19% isn’t too shabby for an investment that does nothing!
There in lies the major issue (and really only issue you need to know) with gold. If you invest in an ounce of gold today, go on vacation for 5 years, guess what you have when you return? That’s right you have an ounce of gold! It doesn’t grow into two ounces. It doesn’t make a product or offer a service in return for payment that results in shareholder income. It does nothing! You are hoping someone else will pay more for it in the future. Needless to say, hope is not a sound investment strategy.
Now, what about the recent performance. Well, again, investors invest for long-term capital growth. We do not invest year by year. So, if we pretended the shiny metal is actually an investment, let’s look beyond the past two years and examine what’s important… it’s historical performance.
This chart goes back to 1915, where the inflation adjusted price of an ounce of gold was
just about $500. That was 105 years ago! It is only up 4-fold from over a centruy ago. That in itself should give you pause (if you ever consider buying it). I’m not even going to tell you what you would have gained with an investment in the stock market. Let’s continue…
Prior to the recent highs for gold, it last hit a high $1,850 an ounce in August 2011. Looking at the chart, you see gold spent the past decade heading down, then up for a whopping total return of 8% or so. What did the stock market do during this period, you ask? Okay, this time I will tell you.
The S&P 500 Index (S&P) was priced at 1,173 on the same day gold hit its previous high in 2011. As I write this, the S&P is at 3,221 for a total return of 175%+ over this timeframe. If you invested $100,000 in gold, you would now have $108,000 while the S&P investor would have $275,000. Kind of a meaningful difference, right!?!
Gold has been defined as a store of value… an asset that maintains its value. In my opinion, that is a stretch. But for brevity sake, let’s go with it. For your own good, let’s never forget this definition and more importantly, remember that gold is not an investment… even during the occasional rise in value.
Note: Nothing contained herein this letter should be considered to be investment advice, research or an invitation to buy or sell any securities. Chart source: Macrotrends.