Short answer: Gold is the safest long-term store of value for the last 6,000 years.
Is gold a good investment? There’s a huge portion of the financial media that fixates on gold.
The most common argument you’ll see is that gold is a hedge for an economic collapse. Gold’s seen as a safe place to store money because it’s been used as a currency for thousands of years.
Gold’s global appeal and limited supply sell many people on the value of gold as an investment. But is it a good idea? As an investor, you’re looking to buy something that will be worth more in the future than it is today.
To measure that, many people will look at intrinsic value or the inherent worth of a company, property, or asset. Most of this analysis will look at the money the potential investment over time might generate.
In the case of a business, you look at the expected profits the company could generate over time. As a shareholder, you’re a part-owner of the business, and so your stock entitles you to a sliver of those earnings.
For a business that grows over time, earnings should also go up, and the value of your piece of ownership should follow. What’s tricky about gold is that as an asset, it doesn’t generate cash.
The piece of gold you own today will be the same piece of gold five years from now — no more, no less. If you buy a house, you can decide to rent it out. Over time, the rental payments you receive could provide a steady flow of cash.
Alternatively, you can live in the house, and instead of paying rent month after month, you’d be making mortgage payments and building equity over time in an asset that is capable of creating cash flows
On its own, gold can’t generate cash, making it a little bit harder to value. The value of gold is tied to its scarcity. It gives it worth in the jewellery market, and it makes it useful as a store of value and means of exchange.
Some of you probably heard that and thought, “What the heck does that mean?” Globally, gold is recognized as a precious metal.
The worldwide recognition means it can be readily exchanged across borders and cultures, which is part of the reason why major institutions like central banks maintain gold reserves.
It’s also why some investors want in on gold. They view it as a hedge against economic instability and inflation. Like the U.S. dollar, paper dollars are fiat currency, meaning they have value because we say they have value.
Sounds familiar? So, if events unfold that lead people to question the value of a fiat currency, or the government takes actions to change the value of the money — like printing way too many bills and giving them out to people — the currency can lose value.
If a currency loses value, the relative value of gold expressed in that currency will shoot up, allowing investors in gold to profit.
Some people keep money in gold because it’s less tied to any one government and isn’t as impacted by inflation or an economic collapse in any one country.
Golds merit as an investment depends on the timeline that you’re looking at. From September 2008 to August 2011, the price of gold went up over 100%, while stocks in the U.S. eked out a 1% gain on a total return basis.
There’s money to be made in investing in gold, but it comes down to being right about gold at the right time because gold tends to surge in value when major financial systems are struggling.
Since September of 2011, stocks have returned over 180% on a total-return basis, while the price of gold has fallen nearly 30%.
The S&P 500 trounce gold returns on a one, three, five, and 10-year basis. Since 1990, the S&P has posted 1,400% gains on a total return basis for people with a very long time horizon.
Over the same nearly 30-year period, gold has returned 220%. If you’re worried about an economic downturn, it may make sense to have a small portion of your portfolio in gold, but it certainly shouldn’t be your main investing strategy.