Unless you're a trader or a tactical investor – and a nimble one at that – you really have no business investing in gold.
Why? Because history shows that gold has been a terrible place to put your cash, even when inflation is running hot.
But first, let's define our terms. You don't even really "invest" in gold. Since the yellow metal produces no cash flows, holders of gold merely speculate on its future price. And anyone who holds onto gold for any length of time almost invariably learns two things: its returns usually lag those of stocks (often by a lot), and it's a poor hedge against inflation.
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I bring this up now because the price of gold is showing signs of life at the end of a week in which it hit three-month lows. Long-term investors would do well to shrug off this news. There's nothing to see here, at least not for them.
Now, to be fair, as mentioned above, gold ETFs and gold miner stocks can be effective tools in the hands of professional traders and tactical investors. But that means knowing when to get in — and when to get out.
Stocks, by comparison, tend to be a very good buy-and-hold bet. Allocate capital to a broad-market index such as the S&P 500, keep saving through dollar-cost averaging and – thanks in part to the miracle of compounding – you might just retire comfortably one day.
Gold can't do that for you, but stocks can. Here's why: unlike gold, stocks represent a claim on something dynamic and real.
When you own equity in a company, your stock represents a claim on the business's assets. But more importantly, your stock represents a claim on the long-term stream of free cash flow generated by that business. That cash can then be distributed to shareholders as dividends or kept on the balance sheet as retained earnings.
Stock entitles a shareholder to a portion of a growing pile of cash. Gold, by comparison, represents a claim on a lump of metal that produces…nothing. As pretty as it might be, gold gets dug out of the ground, refined and then turned into stuff that mostly just sits there.
In the first quarter of 2023, about half of all global demand for gold came from the jewelry industry. Roughly a third went into producing coins and bars, while a fifth was purchased by central banks. Lastly, industrial buyers and exchange-traded funds (ETFs) formed a marginal source of demand for the so-called barbarous relic.
Apart from demand from these sources, gold has no intrinsic value. The price of gold depends on what you can get someone else to pay for it.
This fundamental inertia – gold's inability to generate value and its utter dependence on demand – makes it untouchable for someone like Warren Buffett. Here's one of the billionaire investor's many putdowns of gold:
"Gold has some industrial and decorative utility, but the demand for these purposes is both limited and incapable of soaking up new production. Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end."
Gold is garbage long term
The above arguments are well known, yet they fail to dissuade too many people from owning gold. Perhaps some comparative returns will help to change some minds?
True, past performance is not indicative of future results, and you can manipulate historical returns by fussing with their beginning and end points. Nevertheless, I think the following data make some strong points:
| Gold: | 2.9% |
| S&P 500 with dividends reinvested: | 7.1% |
| Gold: | 6.3% |
| S&P 500 with dividends reinvested: | 7.1% |
| Gold: | 3.2% |
| S&P 500 with dividends reinvested: | 7.2% |
| Gold: | 0.1% |
| S&P 500 with dividends reinvested: | 8.9% |
| Gold: | 4.1% |
| S&P 500 with dividends reinvested: | 6.9% |
| Gold: | -1.1% |
| S&P 500 with dividends reinvested: | 8.1% |
| Gold: | 4.1% |
| S&P 500 with dividends reinvested: | 12.2% |
The historical returns sort of speak for themselves, don't they? Stocks beat gold over every standardized period going back three decades. It's also interesting that returns from stocks were remarkably stable.
What's most striking, however, is that over the past three years – a period in which inflation hit 4.7% annually in 2021 and 8.0% in 2022 – gold generated a negative annualized real return.
So can we please dispense with the zombie idea of using gold as a hedge against inflation? It has a very mixed record in that role historically, and it's been an absolute dud over the past few years as U.S. inflation hit a four-decade high.
Sure, things might change going forward, but the record doesn't lie: stocks are far better at generating wealth than gold. And that's been especially true recently when inflation came roaring back.
Don't be fooled by gold. Those late-night infomercials hawking the benefits of gold coins are based on fear, not reality. Your hard-earned dollars will generate far better returns in a cheap S&P 500 ETF than they will in a bag of magic coins.
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