The quest for gold is long, storied, and bloody. So much of the human story--the expansion
of empires, the destruction of entire cultures --has hinged on the desire to get more of
this mysterious yellow metal. But that’s actually kinda weird when you
think about it. Unlike most assets, gold doesn’t offer any
real-world value like, say, a business or a handful of grain. As Warren Buffet puts it, “It doesn’t
do anything but sit there and look at you.” John Maynard Keyens even referred to gold's connection to currency as a “barbarous relic”...so if that’s true, why am I hearing constant ads from gold brokers
on the radio almost 100 years later? Should we be making space for it in our portfolios
or are we being sold a bunch of fools gold? Gold and humanity go way way back. From Egyptian funerary masks to Celtic ruins,
Peruvian temples to ancient Chinese tombs, evidence of our love of gold is found in practically
every corner of the globe. Throughout this long history, it’s main
purpose has always been for decoration. Even today most of the gold consumed each
year is for jewelry which makes sense because gold is well...“SHINY!” That beautiful golden
hue is thanks to the fact that it absorbs more blue light than any other visible wavelength
of light and since blue is complementary to yellow, that’s what we see. Marketers have long taken advantage of the
fact that yellow is the color we associate with happiness, brightness and possibility. It also has some important industrial uses. Gold reflects most of the solar radiation
in space which is why you can find it in the helmets of astronauts and their equiment. It has a variety of medical uses. And trace amounts of gold are found in millions
of cell phones around the world. But industrial use is one of the smallest
pieces of the gold consumption pie hovering around 10%. After jewelry, its main use is as a financial
tool, because it seems more reliable than wildly fluctuating stock markets, or fiat
currencies that can be devalued on the whims of the government. Gold is traditionally accepted
as a popular hedge against a crisis - and you can often see the price jump when fears
are running high. The Great Recession drove gold prices to all-time
highs over a few short years. And since the COVID19 outbreak began, the
price of gold has been steadily climbing. Despite the fact that it doesn’t pay any
dividends and can’t be usefully consumed like, say, oil or timber, gold can be a profitable
investment. National emergencies like the one we’re
in right now can make self-described gold-bugs look really smart all of a sudden. Over the last 15 years, gold has increased
in value 278% -- compared to the Dow Jones Industrial Average which grew only 173%.. This is why gold-brokers run ads framing gold
as a safe, historic investment for the long-term, while stoking fears of out-of-control governments
and societal collapse. But is it the best long-term choice for growing
your wealth? Probably not. If we expanded the amount of time we looked
back to 30 years instead of 15, gold’s growth is still hovering right at the 280% mark. The DJI on the other hand has posted 839%
growth since 1990. But what if we compared it to something else
like bonds? Well, going back to the 1920’s investment-grade
corporate bonds have had an average annual rate of return of around 5.25%. That would mean in that same 30 year time-frame
even investment grade bonds would have outperformed gold two to one. Many investors frame gold as a perfect hedge
for inflation. This is because even though the supply of
US dollars goes up, the amount of gold remains relatively the same. But that argument is sometimes lacking the
context of timeframe. If expressed in gold, the salary of a Roman
soldier is really similar to the military pay in the US today. But in the late 1980’s when inflation went
from 1% to an eye-watering 6%, gold prices sagged. Goes to show you that time-frame is really
important when evaluating the appropriateness of an investment. Alright, but what about safety? Surely gold isn’t as wild and chaotic as
the stock market, that’s the whole appeal, right? Uh, wrong. As a matter of fact, there’s a strong case
to be made that gold can be much MORE risky than the stock market. That’s because of volatility. Think of it like waves on the ocean. A stormy sea has high volatility with big
waves and toughs. A calm sea is less volatile. Standard deviation is one way we measure the
amount of volatility that an investment has experienced in the past. The higher the standard deviation, the riskier
the investment. And since 1975, gold’s standard deviation
has actually been about 50 percent greater than stocks! So we’re talking about an investment that
over the long haul performs worse than stocks but has higher risk. Am I missing something here? Kind of. Pairing assets that move differently from
one another is key to having a diversified portfolio. Every type of investment-- be it a stock,
bond, piece of real estate or bar of gold comes with itsown unique set of risk-factors
that can affect its value. So by having different types of investments,
you can effectively reduce your overall exposure to risk. The fact that its value doesn’t directly
correlate with the movement of stocks, bonds or real estate makes it a unique flavor in
the investing world. We should also point out that there are MANY
ways of investing in gold.You can buy it in the form of coins or bullion, but dealers
have markups and then there’s the cost of having to store it safely to protect it from
theft or loss. Many gold investors opt for ETFs that have
gold as their primary asset. You can even find mutual funds that own shares
in mining companies. Just know that you’re probably going to
be exposed to the risk of other precious metals like silver or copper if you go those routes. If you’ve been following us for a while
you know that seemingly simple questions like “should I invest in gold?” do not have simple answers. Dismissing it as a hair-brained fixture of
doomsday preppers isn’t entirely fair, but neither is it the slam-dunk inflation-hedge
that gold bugs make it out to be. The mystery and allure surrounding gold is
part of what drives our need for it. It may not be a great builder of wealth, but
its ability to preserve and maintain value over the centuries has made it a remarkable tool. So keeping your eye on the facts instead of the hype, will keep you from getting caught up in the gold-rush. And that’s our two cents! Thanks to our patrons for keeping Two Cents financially healthy! Click the link in the description to become a Two Cents patron.
